Successfully defending against a claim that a building product is defective requires an understanding of the construction industry, especially the documents, project delivery methods, and insurance used in a particular project. These cases usually involve many different parties and such project information is vital in developing the proper litigation strategy and anticipating which parties will fall into the various camps that may share in expert witnesses, coordinate on motion drafting, align on theories of liability, and take a similar settlement posture.
A typical case involves a claim by the building owner or building owner’s insurer that there is something wrong with the building – e.g., leaking roof, failing windows, buckling floors, inadequate ventilation, mold growth, collapsed wall, or burst pipe, to name just a few. The owner/insurer usually asserts some combination of claims of breach of contract, breach of express and implied warranties, negligence, professional negligence, or strict product liability against the architect, engineer, contractor, subcontractors, sub-design consultants, building product manufacturer, product supplier, or anyone else who could have had any conceivable connection to the failure. The general theories of liability come down to:
- Architect liability. The manufacturer properly designed and manufactured the product and the contractor properly installed the product in accordance with the construction drawings, but the architect chose (specified) the wrong product for the application or improperly designed how it was to be installed.
- Contractor liability. The manufacturer properly designed and manufactured the product and the architect properly specified the product and properly designed its installation, but the contractor improperly installed the product.
- Manufacturer liability. The architect properly specified the product and properly designed its installation and the contractor properly installed the product in accordance with the construction drawings, but the manufacturer defectively designed or manufactured the product.
As a result, after filing a complaint, the owner often sits back and watches the finger-pointing. A working knowledge of the construction industry allows you to anticipate who will point at whom and to build your litigation strategy accordingly.
First, there are several different types of documents that you will want to request during the discovery phase of a construction defect case that will prove pertinent. They fall into a few main categories:
- Contract documents: requests for proposal, bids, owner/architect agreements, owner/contractor agreements, sub-consultant agreements, subcontracts, general and supplemental conditions, specifications, drawings, and change orders.
- Project records: meeting minutes, daily reports, logs, diaries, inspection reports, requests for information and responses, architect bulletins, construction change directives, correspondence, project schedules, applications for payment, accounting records, as-built drawings, photo-documentation reports, and email correspondence.
- Product documents: product literature, submittals, installation instructions, warranties, warnings, purchase orders, bills of lading, invoices, specifications, pricing, and quotations.
These documents will tell how the construction was intended to proceed, how it actually did proceed, and whether any issues arose during construction and how those issues were dealt with and by whom.
Project Delivery Methods
Next, a general understanding of the various construction (or project) delivery methods is necessary to understand the primary responsibilities of the key project participants. A project delivery method is the process used to execute a construction project for the purpose of assigning responsibilities and risk to the project team. There are dozens of variations of project delivery methods, but the most common, basic methods are Design- Bid-Build, Design-Build, Construction Manager as Agent, and Construction Manager at Risk.
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Design-Bid-Build, also known as the general contracting project delivery method, is probably the most familiar. The process is linear, where one phase is completed before another begins. The architect is selected based on a negotiated professional fee and works with the owner to design the building under a separate contract with the owner. The architect drafts a complete set of construction drawings and project specifications. The owner then, often with the architect’s assistance, seeks bids from qualified contractors who base their bids on their estimated cost to construct the project in accordance with the drawings and specifications. The contractor is usually selected based on the lowest responsive bid, and there are often many subcontractors under its contract/direction. The contractor and owner then enter into a separate contract, and the contractor is responsible for supplying all building products in accordance with the specifications.
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Under the Design-Build project delivery method, a single entity is solely responsible to the owner for both design and construction of the building. With the assistance of a program architect, the owner determines the basic program for the building (e.g., square footage, number of floors, basic functionality, performance specifications) and provides that information to the design-builder, who sets about designing and building the project in accordance with owner’s program. This process does not require a full set of construction drawings to be completed before construction starts and therefore often results in a faster construction process. It can also result in cost savings because the design-builder is involved early in the design process and can suggest to the owner design and construction options that may reduce the construction costs. It also provides a single point of responsibility for the owner and fosters better communication by reducing adversarial roles between design and construction. Here, the design-builder is also responsible for supplying all building products.
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Under the Construction Manager (CM) method of project delivery, the owner holds separate contracts with the architect and the contractor, who is engaged before the drawings and specifications are complete to provide pre- construction services, such as cost estimating, constructability review of the documents, and project scheduling. Because the construction drawings and specifications have not been completed, CM selection is not based on price, but on qualifications (e.g., experience, history of successful performance, financial strength). Under one of the more popular variations of the CM method, the contractor’s fee is negotiated based on the ultimate project costs and the owner has open-book access to all project costs. The owner participates in the bidding and selection of trade subcontractors and vendors, the most costly component of development, to a much greater degree than in other project delivery methods. Many owners select the CM method knowing that the lowest initial price derived through the design-bid-build bidding process does not always ultimately turn out to be the lowest price nor the best value by the end of construction due to change orders and other variations in project scope and costs. The CM method provides the advantage of involving a construction company early in the design process to advise the owner on cost and constructability issues during the crucial early planning phase.
Within the overall label of construction management there are two different project delivery systems, with variances related primarily to pricing and contractual obligations. In CM at Risk, the CM holds the trades and vendor contracts, taking on the financial risk of construction by providing the owner with a guaranteed maximum price for construction and a set date for completion, along with a negotiated professional fee (typically a percentage of the cost of construction) for the CM services. Under the second type, CM as Agent, the owner holds all trades and vendor contracts and the CM serves as an extension of its staff, managing all the contracts, but holding no financial or performance risk. The risk is contracted with each trade contractor. Thus, under a CM at risk scenario, the CM purchases the building products either directly or through its trade subcontractors,
[Text Box: SUMMER 2016] whereas under a CM as agent scenario, the owner purchases the building products either directly or through its trade contractors.
Thus, depending on the delivery method used to build the project, different entities in the project have differing roles, responsibilities, and relationships with one another, which affects the way that each of the parties approaches liability. For example, in a design-bid-build project, the design team, contractor, and manufacturer are each interested in establishing that the failure is not a result of their role. In a design-build project, however, because the design and construction are both the responsibility of a single design-builder, its likely strategy is to prove that the failure is the result of a defect in the manufactured product, and the manufacturer is alone in establishing that the failure is a result of improper building design or product installation.
For a specific example, consider a case where the initial investigation suggests that a leaking window is the result of improper installation. In a design-bid-build or CM at Risk project, the architect and window manufacturer will likely align in looking to the contractor or CM as the responsible entity. Alternatively, in a design-build project, the window manufacturer will likely be on its own looking to the design-builder as the responsible entity. In a CM as Agent project, the architect, manufacturer, and construction manager would be aligned against the contractor.
Thus, different groups of allies are created depending on the project delivery system used. This is important in predicting litigation costs and exposure to liability. The aligned parties will often be willing to share in deposition and other discovery costs, including jointly retained expert witnesses, and they will likely cooperate on litigation strategy and possibly share in motion drafting. They are also likely to take similar positions when it comes to settlement posture and the amount they would be willing to contribute to a global settlement.
Another important aspect to consider in building a successful defense strategy is the type of insurance applicable to the construction project. There are myriad insurance products and policies that may provide coverage for the loss, and they each have individual and unique coverage issues, all of which vary from state to state. But coverage issues should be considered because understanding the different sources of coverage will assist in anticipating how the parties might contribute toward settlement.
Faced with a construction defect claim, a contractor will look to its commercial general liability (CGL) policy for coverage. The standard CGL policy covers “property damage” that is caused by an “occurrence.” Whether CGL insurance covers property damage that arises from construction defects depends on the interpretation of occurrence. That analysis differs from state to state and is a contested issue in many. Moreover, even where a construction defect is found to be an occurrence, there are policy exclusions (such as the “your work” exclusion) that must be analyzed. As a result, a specific state-by-state analysis is required to parse out potential pockets of coverage amongst the defendants.
The use of “wrap-up” insurance programs adds an additional level or complexity. Traditionally, each participant (i.e., owner, contractor, subcontractor) in a construction project obtains insurance individually to protect against the risk of financial loss. More recently, wrap-up insurance programs have developed on large-scale projects as an alternative to the traditional method of risk management and a way to reduce insurance costs for the entire project. In a wrap-up program, one entity (either the project owner, general contractor, or design-builder) purchases an insurance policy that will cover all the key construction participants such as the owner, design-
[Text Box: SUMMER 2016] builder, construction manager, general contractor, and subcontractors. Typical wrap-up policies provide coverage for workers’ compensation, general liability, and excess liability for the length of a construction project for all or a majority of the parties involved, rather than requiring each participant to be responsible for procuring their own insurance. Wrap-ups are used on large individual projects or on a “rolling” basis by aggregating smaller projects that are started and completed over a defined time period.
The most common types of wrap-up programs are Owner Controlled Insurance Programs (OCIPs) and Contractor Controlled Insurance Programs (CCIPs). The type of Controlled Insurance Program (CIP) is determined by the party that sponsors the wrap-up. The owner of a construction project sponsors an OCIP, while a general contractor or design-builder sponsors a CCIP. The sponsor is in charge of securing insurance coverage and paying for and administering the insurance program.
Wrap-up insurance eliminates duplications in coverage that occur when each contractor and subcontractor purchases independent liability insurance, often with different limits of liability, deductibles, and insurers. This duplication also can result in litigation between the respective insurance companies over responsibility for a claim. In theory, with a CIP, there should be less litigation among contract participants since the same policy insures all of them. What does all this mean for a building product manufacturer involved in a complex construction litigation action? If a CIP is involved, all of the covered entities will be represented by the same counsel with a single litigation strategy and there will be fewer insurers willing to contribute toward settlement.
Coverage for an architect is typically available under the architect’s professional liability insurance policy. An architect has responsibility to perform design services, including preparation of plans and specifications, in accordance with the applicable standard of care and the terms of its contract with the owner. Unlike a CGL policy, the standard professional liability policy does not limit coverage to a specific type of injury, such as “bodily injury” or “property damage,” but covers all amounts that the insured is legally liable to pay as damages because of its professional negligence. As a result, in a construction defect claim, while a contractor may not be covered under its CGL policy, the architect is typically covered under its professional liability policy.
Finally, builder’s risk (or inland marine) property insurance will often come into play where there is damage to other portions of the building during construction as a result of a defective building product. It is not unusual for project documents (especially the General Conditions) to contain a broad waiver of claims/subrogation in favor of all construction participants, including suppliers, that essentially waives the subrogation rights of the builder’s risk insurer for insured claims.
These are just some of the things that are unique to the construction industry. Having a basic understanding of the relevant documents, project delivery methods, and insurance issues can help in developing an efficient and effective litigation strategy when defending a manufacturer against a claim that its building product is defective. In these cases, the risk of exposure is always greater for the manufacturer. If an architect is found liable for its faulty design or specification, or the contractor is found liable for its improper installation, that liability generally is confined to the project. But if a manufacturer’s product is found to be defective, that finding can have repercussions far beyond a single project and may require the recall of the product or expose the manufacturer to liability across the country – potentially involving every project where the product has been installed. In light of this, developing a successful defense based on a complete understanding of the construction industry is vital.