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The Second Circuit’s recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court’s grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured’s defense, after concluding that the district court erred when it ruled that a swimming pool contractor’s liability for cracked concrete could not be covered by its insurance. The district court relied on the “your work” exclusion, but in doing so, it read the “subcontractor exception” out of the policy. The Second Circuit put it back in.

RI Pools is a swimming pool installer that uses subcontractors to supply and shoot concrete into the ground. In 2009, nineteen different customers complained of cracking, flaking and deteriorating concrete in pools installed by RI Pools in 2006. RI Pools tendered to its CGL carrier, Scottsdale, which initially furnished a defense. Scottsdale later filed suit seeking a declaration that it had no duty to defend or indemnify and seeking reimbursement for defense costs already expended.

Relying on the Second Circuit’s 1992 decision in Jakobson Shipyard, Inc. v. Aetna Casualty & Surety Co., 961 F.2d 387 (2d Cir. 1992), the district court reasoned that the cracks in the concrete were defects in the insured’s work that could not be “accidents,” and thus the loss could not be covered and the insurer had no duty to defend or indemnify. In a subsequent ruling the district court ordered the insured to reimburse the insurer for defense costs the insured had paid.

The policy form at issue covers loss caused by “an occurrence,” defined as “an accident” and includes a “your-work exclusion” with a “subcontractor exception” to the “your-work exclusion.” The district court construed the policy form not to afford coverage for the loss from the cracked concrete. In doing so, according to the Second Circuit, the district court “essentially read the subcontractor exception out of the policies.”
In Jakobson, the court ruled that loss defective steering mechanisms in tug boats built and sold by an insured shipyard was not caused by occurrence, and thus not covered under the insured’s CGL policies. But, as the RI Pools court reports, because the policy in Jakobson did not include a subcontractor exception to the “your work” exclusion, the reasoning there does not apply here. Rather to the court, the inclusion of the subcontractor exception in the policy signals that defective work can be an occurrence and that the loss may be covered:

Whereas Jakobson held that the insured’s faulty workmanship could not be a covered occurrence under the policy, the present policies expressly provide that in some circumstances the insured’s own work is covered. As coverage is limited by the policy to “occurrences” and defects in the insured’s own work in some circumstances are covered, these policies, unlike the Jakobson policy, unmistakably include defects in the insured’s own work within the category of an “occurrence.”

Id. at *3. Ultimately, “the question whether the insured’s liability for defects in its own work is covered turns on whether the subcontractor exception applies.” Because the district court never considered this “crucial question,” the court vacated the judgment and remanded the case.

Additionally, the court determined that Scottsdale was not entitled to any reimbursement for the defense costs it previously expended. This was so because, in light of the subcontractor exception to the your-work exclusion, it was “apparent that the damage to the pools caused by the cracked concrete ‘falls…possibly within the coverage” of the policies.'” Id. The duty to defend being broader than the duty to indemnify, that possibility of coverage was enough to trigger Scottsdale’s duty to defend, which duty exists “up until the point at which it is legally determined that there is no possibility for coverage under the policies.”

For another recent decision regarding the recoupment of defense costs, see National Surety Corp. v. Immunex Corp., Case No.86535-3, March 07, 2013. In National Surety, the Supreme Court of Washington last month ruled that Washington law does not allow an insurer to recoup defense costs incurred prior to a determination of non-coverage.

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Do you really need that progress payment lien release notarized? It’s such a pain in the rear, isnt’ it? Isn’t a signature enough? After all, you don’t get your contracts notarized–well, not most of them.

This was the discussion around our water cooler the other day, initiated while some of our lawyers were re-writing a standard form subcontract for a client who does work in many states. Notarizing documents certainly seems like something from a bygone era–when there were horses, buggies, and buggy-whips. Maybe notaries will be like those notorious buggy-whip makers a century ago. After all, the federal government has long accepted un-notarized declarations in lieu of notarized affidavits. See 28 USC § 1746.

So why do we still need notaries? Because some people are liars. Or, more accurately, forgers. Check out this nightmare.
Sadly, one good reason to have your lien releases notarized is to provide a last check that the party who supposedly executed it doesn’t say their signature was forged. Forgery.jpgOf course, a forged lien release is a lot different than a forged performance bond–but they’re both likely to land someone in the pokey.

But the first answer to the question is much less interesting: Many states require notarized lien releases by statute. Of course, those can change too.

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The American Society of Civil Engineers (“ASCE”) has released its 2013 Report Card for America’s Infrastructure. The Report Card assigns a letter grade to sixteen major categories of infrastructure – such as bridges, dams, and roads – based on capacity, condition, funding, future need, operation and maintenance, public safety, and resilience. The individual categories ranked by the Report Card range from a high of B- for solid waste to a low of D- for inland waterways and levees. The 2013 Report Card gives the nation’s infrastructure a D+ GPA and estimates that $3.6 trillion in investment will be needed by 2020 to maintain a state of good repair.

The D+ rating is up only slightly from the D GPA given by the ASCE’s last Report Card in 2009. And the study is replete with grim statements. For example, it notes that, “much of our drinking water infrastructure is nearing the end of its useful life,” “one in nine of the nation’s bridges are rated as structurally deficient,” and “[f]orty-two percent of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually.”

The ASCE’s President, Gregory E. DiLoreto, notes that much of the nation’s infrastructure was put into place over fifty years ago and is simply “overwhelmed or worn out.” Mr. DiLoreto notes the current backlog of infrastructure projects and deferred maintenance, and he stresses the need for innovative solutions and increased investment. According to Mr. DiLoreto, failure to address these projects will cost American families an estimated $3,100 per year in personal disposable income.

So how does America improve these abysmal grades? According to the ASCE, the solution is simple – “when investments are made and projects move forward, the grades rise.” With many cash-strapped states now looking to public-private partnerships to address their infrastructure needs, perhaps the 2017 Report Card will be an improvement.

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On March 1, 2013, President Obama ordered the implementation of across-the-board cuts – sequestration – primarily directed to military and domestic discretionary spending because the White House and congressional leaders could not agree to an alternative. The Balanced Budget and Emergency Deficit Control Act of 2011 requires this sequestration, which means that the executive branch must implement $85 billion in cuts over the remaining months of Fiscal Year 2013. This alert provides background on the expected cuts and how the sequestration may affect contractors. Notably, the sequestration is separate from the continuing resolution funding the federal government that ends on March 27, 2013. If Congress does not act to fund discretionary spending for the remainder of Fiscal Year 2013, then the government will shut down. We have also prepared pointers for federal contractors in the event of a shutdown.

To learn more about this, click Sequestration is Here – Now What Happens to Government Contractors to read the client alert.

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Ah, Paris – arguably the most romantic place in the world (although my vote would be for MetLife Stadium). In a recent twist on Parisian public displays of affection, locals and tourists alike have taken to affixing locks to some of the city’s bridges and throwing the keys into the Seine. While city leaders debate whether the “lovelocks” are graffiti or a boon to tourism, one thing is absolutely certain – they represent a lot of dead load (or would they be considered live load?) that was never factored into the bridge design. Let’s hope these bridges don’t collapse under the weight of all that love.

The smell of love is in the air – or is it raw sewage? Take your special someone on this Valentine’s Day tour and they’re one and the same. Just remember the hand sanitizer. And, if anyone actually proposes during the tour, please upload it to YouTube!

Finally, for all you cynics out there, here’s a story that has absolutely nothing to do with love. Leave it to the hometown of Microsoft (and grunge music) to build a bridge that has record-setting brawn and a whole lot of electronic brains. Seventeenth century physics will keep the world’s largest floating bridge from sinking to the bottom of Lake Washington but its remote sensors and construction methods will sport a decidedly more modern feel. The new pontoons will be affixed with over 1,000 water sensors which will send a signal through a programmable logic controller to the 24 hour maintenance facility whenever water leaks are detected. Rebar will be protected from corrosion by low-voltage DC electricity. And, in a nod to security concerns, the bridge will be outfitted with multiple security cameras, intrusion detectors and sharks with laser beams attached to their backs will patrol the depths below – just kidding about that last one – or am I?

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In January, President Obama signed the National Defense Authorization Act for Fiscal Year 2013 (“NDAA”), which includes numerous new procurement policies directed at contractors and how they bid on and perform government contracts.

To learn more about this, click here to read the client alert.

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To learn more about the ways investors and new market entrants are attempting to develop what is emerging as a new single-family asset class, the regulatory changes that have caused banks to retreat from participation in the mortgage servicing business, and compliance challenges for existing and new servicers, click here to read the client alert entitled Trends in Single-Family Housing written by Craig A. deRidder, Peter G. Freeman and Joseph T. Lynyak, III.

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On January 29, 2013, a final rule was issued prohibiting the award of contracts to inverted domestic corporations. The final rule requires an offeror to represent that it is not an inverted domestic corporation and creates potential liability if the contractor’s legal status changes after the contract is awarded.

To learn more about this, click here to read the client alert that was written by John Jensen and Evan Wesser.

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An insured’s duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer’s ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.

In Staples v. Allstate Ins. Co., a van belonging to the insured John Staples that contained a large collection of tools was stolen. Staples reported the theft to the police, telling them that the van was a work truck and the tools were worth $15,000. In submitting a claim to his insurer Allstate, Staples represented that the tools were worth $20,000 – $25,000, and were for his personal use. Based on these apparent inconsistent statements, Allstate requested certain documents from Staples, including proof of ownership and a sworn statement in proof of loss, among others. Allstate took two recorded statements form Staples, neither of which was under oath.

The sworn proof of loss and other information was not provided by Staples until nearly three months after the loss. Apparently unsatisfied with the information received, Allstate requested that Staples appear for an examination under oath, which it was entitled to under the cooperation clause of the policy. After difficulties scheduling the examination through a perceived lack of cooperation by Staples, Allstate denied the claim. In a suit by Staples against Allstate for breach of contract and bad faith, the trial court ruled in favor of Allstate on summary judgment, holding that coverage was barred because Staples breached the cooperation clause by failing to appear for an examination under oath. The Court of Appeals affirmed, and the case was appealed to the Washington Supreme Court.

The Washington Supreme Court reversed, finding material issues of fact as to (1) Staples’ compliance with the cooperation clause and (2) whether any prejudice was actually incurred by Allstate as a result of Staples’ alleged lack of cooperation. As to the first issue, the court held that “[b]reach of a cooperation clause is measured by the yardstick of substantial compliance.” Staples’ appearance for two recorded interviews and production of many of the documents requested by Allstate was enough to demonstrate a genuine question of material fact as to the adequacy of Staples’ “cooperation.”

The court further held that an insurer must show prejudice before it can rely on breach of a cooperation clause to deny a claim. A showing of actual prejudice requires “affirmative proof of an advantage lost or disadvantage suffered as a result of the [breach], which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability.” Id. (quoting Dien Tran v. State Farm Fire & Cas. Co., 961 P.2d 358 (Wash. 1998)). The court explained that the burden to show prejudice is on the insurer, and is an issue of fact that will seldom be established as a matter of law. Prejudice will be presumed (as a matter of law) only in “extreme cases.”

In short, for an insurer to deny coverage based on breach of the cooperation clause, the insurer must show a substantial and material breach of the cooperation clause that results in actual prejudice.

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Recently, the California Contractors State License Board (CLSB) issued an Industry Bulletin confirming that contractors may not perform abestos removal or abatement work if the work is not performed within the contractor’s license classification(s). An asbestos abatement certification by itself is not a CSLB contractor’s license classification. To obtain such a certification, the applicant is not required to have four years of experience, the minimum experience requirement for the CSLB to issue a contractor’s license.

Contractors who want to become certified to perform asbestos removal and/or abatement must be tested by CSLB and also register with the Department of Industrial Relations’ Division of Occupational Safety and Health (Cal OSHA). Once registered, the contractor must submit verification of the Cal OSHA registration to the CSLB. The CSLB will then add “ASB” on the license to indicate that asbestos removal/abatement can be performed within the contractor’s license classification(s).

To read the CSLB’s Industry Bulletin, click here, and to read the related legal opinion, click here.