California Business and Professions code section 7159 comprises eight pages of small type covering home improvement contracts, which makes it difficult for contractors to always follow the letter of the law.
“There are so many very technical requirements in 7159, including type size and placement of various provisions within the contract document, that even a conscientious contractor might miss them,” says Kevin P. Cody, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business spoke with Cody about construction contracts and how companies can avoid problems that void agreements.
When do contract problems arise?
Obviously, if construction goes well, the contract typically isn’t brought up. But when there is a problem, the homeowner or his or her attorney will search the contract for defenses. For example, the entire contract can be voidable or unenforceable if the contractor hasn’t complied with all of the requirements of section 7159, which are numerous and pretty detailed.
California law gives particular protection for home renovation projects because it’s frequently a one-on-one relationship between an inexperienced homeowner and a contractor. Prior to enactment of 7159, a homeowner might find himself or herself in a position where substantial upfront payments had been made, the contractor would only be partway through with work, and all of a sudden the homeowner couldn’t find the contractor. In a commercial setting, where you’re dealing with people who are quite sophisticated and savvy, they do not require the same degree of protection.
However, strict compliance with 7159 will not always work as a defense for the homeowner. A landscape designer/contractor client didn’t strictly comply with all code provisions, and a homeowner, because he was dissatisfied with a few things, hired an attorney and decided not to pay. The homeowner filed a lawsuit, claiming the contractor’s failure to strictly comply with 7159 justified nonpayment. In spite of the landscape designer/contractor’s failure to strictly comply, the court sided with the designer/contractor and awarded it all of the money the homeowner had withheld.
How detailed are the code provisions?
A window company wanted contracts prepared for installations it was going to be doing. On the first page of the contract, you have to mention the date the buyer signed, there has to be a notice of cancellation and a heading that says ‘home improvement’ in at least 10-point, bold face type — that comes straight from the statute. There are a lot of other very detailed requirements.
What should you do to draft contracts that are compliant?
Most contractors already have contracts that comply in certain areas, but in many instances they haven’t updated them. An attorney can go through and make recommendations. In addition to compliance with the technical requirements of 7159, there are other statutes with provisions that the contractor may not appreciate fully, e.g., those dealing with attorney’s fees, or with provisions that have changed in the last few years, e.g., indemnity.
For example, Civil Code section 1717 states that if a contract provision allows one party to recover attorney’s fees, it will be reciprocal to the other party. Without knowing about 1717, the contractor may want an attorney’s fees clause in the contract that only allows the contractor to recover fees if it has to sue to collect payment. But what happens if there is litigation and the other party can recover attorney fees, even if it isn’t mentioned? It becomes an issue of whether the contractor really wants the clause because it might engender litigation.
Similarly, while the law with respect to what general contractors can be indemnified for recently changed to limit indemnity rights, there still are ways to improve the situation. Though a general contractor cannot be indemnified for its active negligence, it typically has leverage over subcontractors to request that the general contractor is named as an additional insured on the subcontractor’s insurance.
It’s a good idea to update your contracts every two or three years with an attorney who specializes in construction contracts. The cost will be relatively modest in the long run, especially considering the benefits of that review.
Kevin P. Cody is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4557 or email@example.com. To learn more about Kevin Cody.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Just when the construction industry was about to emerge from the doldrums, a series of game-changing events has raised the stakes for some of its major participants. Design professionals and contractors face increased risk and liability following the introduction of new design standards and several precedent-setting court decisions.
“The convergence of recent activities is a call to action for architects and contractors,” says Steve Erigero, a partner specializing in commercial litigation at Ropers Majeski Kohn & Bentley PC. “They must take immediate steps to minimize exposure.”
Smart Business spoke with Erigero about the ways design professionals and contractors can benefit from the rebound while limiting their exposure.
What’s behind the rise in liability for contractors and design professionals?
Design professionals were largely immune from liability under California Senate Bill 800, but that changed when a California appeals court ruled that homeowners and homeowners associations could now sue them for defects.
Then, the California Legislature eliminated another safe harbor, when it decided that contractors and developers could no longer pass liability to downstream parties like subcontractors.
Finally, the escalation of green building projects has resulted in a host of new design standards and certifications. Professionals who fail to comply with Leadership in Energy and Environmental Design or other green building standards may be held liable for any shortcomings.
What are the most common risks associated with development projects?
Architects can be liable for construction defects, delays or cost overruns resulting from plan deviations as well as the improper installation or under-performance of specified building materials. For instance, they can be liable for a leaky window, even when the framer or product manufacturer is at fault. In addition, design professionals risk becoming a deep pocket if a general contractor is underinsured or files for bankruptcy.
To protect themselves, architects need to perform visual inspections throughout the course of construction and make sure their contracts include clauses that limit pass-through liability.
How can professionals minimize exposure to risk and liability?
The first step is to conduct a risk assessment and an insurance review. Even a high-deductible insurance plan may be better than going bare, but you need facts to assess your exposure and determine your risk tolerance.
Next, be cautious about signing indemnification agreements given the court’s reinterpretation of Senate Bill 800’s statutes. A contract review may reveal opportunities to insert clauses that limit liability and damages, especially in California.
Finally, consider the capitalization and financial stability of builders and developers before taking on a project. You certainly don’t want to be the last guy standing in the event of litigation.
How can professionals head off potential problems by working with legal counsel?
Besides helping with contract and insurance reviews, your lawyer can alert you to possible trouble by monitoring litigation activity on your current projects. It may be possible to mitigate risk by purchasing insurance if you receive a timely warning. He or she can help contractors decide whether to hire employees or continue subbing work out. Since contractors can no longer pass-through liability, it may be less risky and more profitable to exercise greater control over the construction process. Your lawyer can even help you compete for new deals by creating several versions of the same contract with varying levels of liability. That way, you can tailor your risk each time you bid on a project.
The key is to take immediate action so you don’t miss out on the long-awaited rebound in the construction industry.
Steve Erigero is a partner, Commercial Litigation, at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2013 or SErigero@rmkb.com.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Today it is standard practice for building owners and developers to require evidence of commercial general liability insurance from contractors that are doing construction work for them. This insurance coverage provides protection for bodily injury claims arising out of injuries at a job site, says Philip Glick, a senior vice president at ECBM Insurance Brokers & Consultants.
“It also covers claims due to physical damage to the construction site or adjacent property that may occur as a result of a negligent act by a contractor or subcontractor,” says Glick.
Smart Business spoke with Glick about how the right insurance can protect you against contractors’ errors and omissions.
Why isn’t general liability insurance coverage enough?
We are seeing an increasing number of claims arising out of negligent work by contractors that are not insured under their general liability policy. Examples include a pure economic loss the owner suffers as a result of negligent acts by the contractor but where the claim does not arise out of bodily injury or property damage liability. Such economic loss could include cost overruns as a result of the general contractor’s or construction manager’s failure to properly bid subcontracted work, or to manage the overall project costs, especially if the project is on a cost-plus basis.
Another example would be a loss suffered by a business owner or tenant as a result of construction delays, or a loss incurred by a retailer that was counting on occupancy prior to the Christmas shopping season but the space is not completed until January.
Almost all contractor’s and construction manager’s general liability policies contain an exclusion of bodily injury and property damage claims arising out of the rendering or failure to render professional services. Examples are negligence in the hiring or supervising of architects or engineers, or preparing or approving maps, shop drawings, surveys or drawings but where the loss is not directly caused by the contractor’s construction work.
How can a building owner or developer cover against these uninsured risks?
The solution is for the building owner to require the general contractor or construction manager to purchase contractor’s/construction manager’s professional liability insurance as a part of the contractor’s insurance. This is specifically designed to provide protection for economic losses incurred by an owner or another third party due to negligent scheduling, purchasing, cost overruns and delay costs described before caused by the construction manager’s or general contractor’s negligent acts. This coverage can also insure property damage and bodily injury liability claims arising out of a contractor’s professional errors.
What major exclusions or coverage gaps may be included in professional liability coverage?
Contractor’s professional liability insurance is not intended to cover contractual guarantees or warrantees made by the general contractor or the construction manager. If a contractor guarantees a project will be completed by a specific date, that the cost of the project will be no more than a specific amount, or that a project will perfectly meet the needs of the owner or tenants and then fails to meet those guarantees, these events will not be covered under the contractor’s professional liability policy. However, if these events were caused by the negligent acts or omissions of the contractor, the insurance would apply.
Contractor’s professional liability insurance typically does not include coverage for claims arising out of professional negligence of employees of the contractor or construction manager who are performing architectural or engineering work. Separate architect’s or engineer’s professional liability insurance is typically needed to cover these professional services. Some contractor’s professional liability policies can, however, be endorsed to cover these additional professional services.
Contractor’s professional liability insurance almost always excludes claims brought by one insured person or entity against another insured person or entity under the policy. An owner may, as an example, request they be added to the contractor’s professional liability policy as an additional insured similar to the requirement to be added to the contractor’s general liability policy. Unfortunately, if the owner is added as an additional insured, there is no coverage for a claim brought against the general contractor or construction manager. A solution may be to amend the insured versus insured exclusion so it does not apply to the owner or developer as an additional insured.
What else does this insurance not cover?
Contractor’s professional liability insurance also does not cover claims arising out of faulty workmanship. This includes the cost to replace faulty materials that have been used.Coverage for faulty workmanship or warranty repairs can be covered under a separate contractor’s performance bond.
General contractor’s and construction manager’s professional liability policies are almost always written on a ‘claims-made’ basis in contrast to the contractor’s general liability policies, which are typically written on an occurrence bases. Under a claims-made professional liability policy, there is only coverage for a lawsuit or claim filed by the owner against a contractor for negligent work if the contractor or construction manager has a policy still in force when the claim is brought, as opposed to when the negligent work was performed or when bodily injury or property damage took place.
One solution is for the owner to require the contractor to continue to renew its professional liability policy for a minimum period in the future after the work is completed, typically two to three years. Another requirement could be to specify that the contractor must purchase a ‘tail’ or extended reporting option that provides a 12- to 24-month extended reporting period for a claim to be filed arising from prior work, if the contractor should nonrenew his policy in the future.
Philip Glick is a senior vice president with ECBM Insurance Brokers & Consultants. Reach him at (610) 668-7100, ext. 1310, or firstname.lastname@example.org.
Insights Risk Management is brought to you by ECBM Insurance Brokers & Consultants