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Roofing

By Dale, Braden & Hinchcliffe

Regardless of how long you've been in the roofing trade, you know there's no getting around construction defect claims. The best defense to such prevalent and costly matters is often a finely-tuned offense, but such a strategic stance requires organization, forethought and communication -- from you and your attorney.

The following information is intended to help you understand your role in transferring litigation risk and increase your chances of success if a claim is filed. Remember that knowledge is your most powerful tool in any litigation matter. So, don't be afraid to ask questions; contracts and insurance policies are filled with legalese that can make them difficult to understand. Although such principles as risk transfer, additional-insured endorsements, indemnity provisions and Montrose exclusions are critical to any liability package a roofer may have, they are not always so clear-cut.

A Look at the Language

Let's begin by understanding risk transfer and additional insured endorsements.

The concept behind risk transfer is allocating the risk of losses between parties to a contract. In most cases, the party with the greater economic power tries to assign as much of the risk as possible to another party while keeping as much of the benefits for itself.

With construction contracts, builders have traditionally transferred the risks of bodily injury and property damage claims liability to subcontractors by indemnity agreements in their contracts and by requiring subcontractors to name the builders as an additional insured on the subcontractors' insurance policies.

Additional insured endorsements are used to add an entity to an insurance policy. Usually, the entity is a contractor, owner or developer who is added to the policy of the lower-tier subcontractor, contractor or material supplier. These entities are usually added by endorsement after the insurance policy has been issued to the original policyholder. Once the additional insured endorsement has been issued, the "added entity" has the same rights and duties as the original policyholder.

There is no statute or regulation requiring this type of risk transfer method, but it is usually specified in the insurance-requirements section of the construction contract.

The insurance provision of the contract sets out the scope of requirements for providing insurance, including additional insured status on the subcontractor's insurance policy. Because the exact wording of the requirements varies with each contract, be sure you review the verbiage with your attorney and insurance broker to ensure that proper compliance with insurance provisions has been met. In addition, you can make sure you have the exact coverage you need; roofers' requirements may differ from those of other subcontractors.

Consider a 1999 court case -- Acceptance Insurance Co. v. Syufy Enterprises -- involving additional insured endorsements as they apply to a roofer's insurance coverage. As explained in a recent issue of The Risk Management Letter, the court "found that a general contractor added as an additional insured under a subcontractor's liability policy was covered under the subcontractor's policy, even though the claim triggering coverage was based on an alleged injury not actually caused by subcontractor's work. The key element of this finding was that the endorsement adding the contractor as an additional insured linked the general contractor's coverage to liability 'arising out of' the subcontractor's work. Under such wording, coverage may be triggered even if the alleged injury is not actually caused by the subcontractor's work."

More on the Blame Game

Risk will always be an element of construction because of the fluid nature of the work, the physical activity required, and the numerous trades involved. To transfer as much risk as possible -- including responsibility for someone else's negligence -- to a third party, construction companies use indemnity provisions in their contracts. Each court's interpretation of indemnity and contract language can vary, so there are no hard and fast rules that can be applied to every contract. Therefore, it is important for roofers to recognize indemnity language, understand how it effects the meaning of a contract, and the ways in which these provisions can shift liability.

Typical indemnity provisions used in construction contracts are those in which the owner requires the subcontractor to indemnify the owner, or excuse the owner from liability. In this case, the owner is the indemnitee (the party who is indemnified by another) and the subcontractor is the indemnitor (the party who is indemnifying another party).

Indemnity provisions are the key contract elements examined by the courts when a claim or lawsuit arises from a third-party construction dispute. First, the court looks at which party is at fault, and then determines whether this responsibility was transferred to someone else by an indemnity provision in the contract. The contract will be interpreted by the courts as a whole. In addition, the courts may consider the parties' intent within the context of the entire contract if it is not clear by the terms of the agreement.

There are two types of indemnity provisions: general and specific.

General indemnity provisions read something like this: "The subcontractor agrees to hold an owner harmless in any suit at law, from all claims for damages to persons or property." This is usually interpreted that indemnity is provided if the loss results in part from the indemnitee's passive negligence -- for instance, a property owner's failure to discover the dangerous condition of a railing. This type of language only indemnifies the owner for the contractor's own negligence, and not for negligent acts of the owner.

Specific indemnity provisions are more favorable toward an owner or developer. A specific provision provides indemnity for the active negligence of the owner. Typically, a contract drafted by a developer/owner/general contractor will specifically include its acts of negligence in the indemnity agreement. Look for language added to a general provision, such as the following clause: "...even if the claim alleges active or passive acts of negligence on behalf of the owner or its agents." This specific wording makes the indemnity provision a broader, more powerful risk-transfer tool for owners.

But, remember that indemnity is subjective -- many factors contribute to a court's decision in a dispute. If an indemnitee is found to be solely negligent or has performed some act of willful misconduct, neither a general nor specific indemnity provision will be triggered. Therefore, if the court determines that an act of the indemnified party is solely negligent, the indemnitor will not be obligated to indemnify. In addition, the courts take into consideration the overall meaning of the contract in its entirety and how the parties interpreted the contract. The setting of the dispute is also considered. In some cases, courts have been persuaded that subcontractors on a commercial job have more control over their work than those working on a residential job. And, they have concluded that strict liability is not ordinarily applied in commercial construction, holding the owner at the same level of liability as the subcontractors.

Keep in mind that if there are any ambiguities in the contract language, it will be held against the party drafting the indemnity provision. Make sure you understand the characteristics and impact of indemnity language. Don't hesitate to ask as many questions as necessary until you know exactly what you're signing.

It's All in the Timing

Being fully informed also includes understanding Montrose Exclusions (also called known-loss exclusions). The case of Montrose v. Admiral Insurance Company changed the legal construction-insurance environment in California. The issue of which insurance company should respond to any given continuous-loss case was resolved in favor of a broad increase in the number of carriers on the risk. Under Montrose, all carriers insuring a particular client between the time a loss began and the time that liability was finally ascertained, owed a duty to defend the insured.

The vast majority of commercial general liability insurance polices are written on an "occurrence" basis, meaning that the policy will cover losses occurring during that policy period (usually one year). However, when it comes to construction liability, it can be difficult to determine exactly when a loss occurs.

Many carriers take the position that all occurrence policies that are in effect -- from the time of original construction to the moment a lawsuit is completely resolved -- must respond to a claim. Others interpret coverage so that a policy that is in effect during some part of the loss occurrence should respond to a claim.

Because the Montrose court invited carriers to change their coverage if they were at odds with its ruling, the definition of occurrence has changed in newer insurance policies. These changes are often referred to as Montrose or known-loss exclusions, the goal of which is to have the policy response limited, or to not respond to continuing losses, such as construction defect or environmental claims, if they were known prior to the policy's start date.

In a construction defect case, every policy in effect during the time a damage or injury occurred may be obligated to respond on your behalf and provide a defense to the claim. In the last few years, some policies have changed this rule through the use of Montrose exclusions. The bottom line is that it is extremely important to review any changes to your general liability policy.

Roofers Benefit

Keeping yourself up to date on what is happening on the CD litigation front also includes the hard-won victories, such as Supreme Court's decision in the December 2000 AAS v. Superior Court case, which is good news for roofers. The Court ruled that plaintiffs in a construction defect case must show actual damages, as opposed to anticipated damages, in order to recover damages against a builder or subcontractor under strict liability or negligence theories. Therefore, tort claims for roofing construction defects will be limited to cases where roofs are actually damaged and causing consequential property damage to other property. Cases such as those where an expert claims that the roofing is not installed to code, manufacturer's specification or other standards may not be cause for legal action.

In addition, the decision will make it easier for insurance companies to distinguish between contractual warranty claims (which are generally not covered) and true property damage cases where poor roofing construction has actually caused property damage. Most carriers don't complain about paying indemnity on legitimate claims, it is the overblown cases that lead to carrier frustration.

Keep It Neat and Clean

As you can see, knowledge and communication are key if roofers are to protect themselves against potential construction defect litigation. Organization is also imperative because you will be called upon to provide your attorney with a great deal of information. The following tips will prevent you from having to play "catch up" once a claim has been filed.

Maintain detailed records of problems with employees, contractors, and suppliers.
Create daily reports, and instruct site supervisors on how to do so.
Keep daily reports organized and easy to locate.
Examine all aspects of risk management, including safety issues for your workers and the public.
Participate in industry groups that may play advocacy roles for legislative, regulatory and policy reforms -- they provide a wealth of knowledge and support.
Regardless if you're a veteran of the roofing trade or new to the business, you want to be one step ahead of any potential construction defect litigation. Stay in that offensive mode -- have a keen understanding of the contracts you sign, keep detailed, organized records, maintain open lines of communication with your insurance carrier -- and any legal wranglings should be minimal. For more information about protecting yourself against costly CD litigation, contact your attorney, or visit our Website, www.dbhlaw.com.