The stage is set for multi-party defect litigation in the construction industry. Contractors are working with much smaller margins than in the past, which means more responsibilities for fewer people and more opportunities for construction defects to slip through the cracks. Smaller margins also mean members of the construction industry are less financially able to fix a problem when it arises, and may look to several parties—contractors, subcontractors, suppliers, developers, engineers, architects and insurance carriers—to share the burden of costly repairs. The convergence of these factors can result in multi-party defect litigation.

While multi-party defect litigation occurs infrequently for most contractors, these cases can be extremely expensive and time-consuming and can even lead to the loss of a business. However, there are ways to promote quicker, less costly resolution of multi-party defect litigation and avoid unnecessarily wasting money and resources. 

NOTIFY FIRST
Contractors seeking to satisfy customers and avoid multi-party litigation may immediately correct the defect while planning to submit the cost to their commercial general liability (CGL) insurance carrier after the fact. Unfortunately, a contractor that corrects defects right away may have its insurance claim denied for failure to timely notify the carrier of the claim and failure to allow the carrier to investigate the extent of the damage and the price of the repair.

While CGL insurance generally excludes coverage for work performed by the contractor holding the policy, it may cover work performed by the policyholder’s subcontractors. Also, the policy is likely to offer coverage for demolition and replacement of work damaged by the defective work, as well as attorneys’ and experts’ fees to defend the contractor in the case of litigation. To preserve this coverage, a contractor must immediately provide written notice to its insurer, even if the claim is only precautionary, and allow the insurer to conduct a prompt investigation of the alleged defect.

In addition, contractors should immediately evaluate whether their subcontractors or suppliers may be liable for part or all of the defect. Just as with insurers, prompt written notice to subcontractors or suppliers (giving them the opportunity to investigate the alleged defect) will eliminate defenses to liability and greatly shorten the time required to reach resolution.

Standard indemnity language found in most construction contracts requires subcontractors (or more likely, their insurers) to defend upstream parties in litigation, which can save upstream parties hundreds of thousands of dollars in protracted litigation scenarios. To invoke this duty, a contractor must request that the subcontractor assume the upstream party’s defense through a tender-of-defense letter. Generally, the subcontractor’s liability for defense costs begins when the subcontractor is notified of the request that it assume the contractor’s defense.

WORK CLOSELY WITH COUNSEL

For a contractor facing multi-party defect litigation, it’s crucial to work with counsel that understands the construction industry. After a contractor files its insurance claim, the insurance carrier ordinarily provides counsel to defend the contractor. Large contractors may have the bargaining power to pre-select their counsel when purchasing insurance. If the contractor believes its counsel could address the matter in a more efficient or cost-effective manner, the firm can request that the insurer agree to use the attorney who handles the contractor’s other matters. The insurer is not obligated to comply with such a request, but may be willing to do so.

Contractors often are inclined to let unfamiliar insurance counsel deal with defect cases rather than engage in the process as they would with counsel they chose themselves. However, insurance defense firms generally specialize in insurance work, as opposed to construction disputes, so the contractor’s project and general construction knowledge can help the counsel get up to speed and provide a more effective prosecution or defense. 

As the case matures, contractors and their counsel may find additional parties’ work is implicated in the defect’s cause. When this occurs, it is important that a contractor immediately discuss whether to add those parties to the case. Adding additional liable parties promptly preserves a contractor’s claims against a party that might otherwise expire during litigation. In addition, a liable party’s absence in settlement discussions creates uncertainty and a perception that the remaining defendants are contributing more than their share to the resolution. Adding parties to the case early can greatly decrease the duration and cost of multi-party litigation, partially because trials often are postponed when new parties are added, which also postpones the pressure to settle.

GET INVOLVED IN THE SOLUTION
Contractors are in the best position to work with the other parties to identify and execute a creative solution to repair the project or mitigate damages. If a contractor cannot fund repairs, an owner, general contractor or insurer may be willing to make a loan to help supplement the contractor’s repair efforts and mitigate damages. Working together to repair the structure also may change the plaintiffs’ attitude and the amount it seeks to recover from parties that have helped in the repair process.  

Some contractors may find their alleged defective work is not intermingled with the liability of other defendants in the case. A contractor with such separate liability can expect its litigation bills to be exponentially greater due to the other parties’ activity in the case. Often, such contractors are forced to respond to discovery from other defendants even though no claim exists between those parties, or to participate in motions, hearings and long mediations that only tangentially address issues related to claims against them.

A contractor with separate liability should push its counsel and carrier to reach a resolution quickly, regardless of the status of the rest of the litigation—whether it’s through payment of a sum or a repair effort coordinated with the contractor’s insurer. Contractors with separate liability may be able to arrange separate mediations with the plaintiff focusing on the issues that only concern them, and are likely to have much better results.

HOW TO AVOID MULTI-PARTY LITIGATION
The easiest way to avoid being dragged into multi-party defect litigation is to be mindful of the work performed by the prior contractor. If the existing work looks like it will not serve its purpose, or does not allow for the proper installation of the next phase of work, the contractor must give written notice to the general contractor, architect or engineer, as appropriate, and preserve that notice and any response in the file.

Similarly, any field directive to modify the work called for in the plans and specifications, or to deviate from the contractor’s general practice, should be confirmed in writing. By doing these simple things, a contractor can limit the resources it is forced to expend on multi-party litigation.


Danielle N. Senn is a construction attorney in the Dallas office of Ford Nassen. For more information, call (214) 523-5100 or email dnsenn@fordnassen.com.