In today’s environment, most construction projects end up in some form of litigation. Construction is full-time employment for lawyers – from contract negotiation to project management, lien and payment issues. Years after project completion, a company still can face construction defect litigation and be served with a Notice of Opportunity to Repair, which in most states is now codified into statute. This is the beginning of what most likely will become a lawsuit, involving many of the subcontractors.

Watch Out for the Construction Contract Blame Game
The first phase of post construction litigation involves the review of contract and insurance policy language in an attempt to transfer responsibility in the litigation to other parties.

Before construction began, contract negotiation focused on budget and timeline. In the post-construction phase, two less noticed provisions of the contract are critical – indemnity and insurance.

Indemnity is a contractual obligation of one party to compensate the loss occurred to the other party due to the act of the indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to "hold harmless" or "save harmless." Many states have restrictions that must be observed in order to enforce a right to indemnification. Some states prohibit it altogether, and some allow the indemnitee to be indemnified for its own negligence. Frequently, standard contracts run afoul of state restrictions. Consequently, it is critical that local law be considered in the contract negotiation phase.

Proper Insurance Coverage is Imperative

Insurance can also provide an alternative means to transfer responsibility to another party in the litigation. Many construction contracts contain a provision requiring that one party make the other party an “additional insured” on its policy. Most insurance policies issued to construction companies contain a provision that automatically makes a company an additional insured if the contract requires it. The contract and policy language encounter are endless in their variety. The extent of the coverage provided may be dictated by contract language, so it important to be well advised in the contract negotiation process.

Obtaining the benefit of being an additional insured can get extremely complicated. Commercial general liability policies usually cover damages that occur within the policy period. In construction defect cases, the damage may have occurred in any of the years between the certificate of occupancy and the first notice of any problems. 

Generally speaking, all of the policies that provide coverage between the certificate of occupancy and first notice of damage would be “triggered.” For example, a general contractor in a litigation involving the work of 10 subcontractors, where the certificate of occupancy was five years before the first notice of damage, may be covered under 50 different policies (10 subcontractors multiplied by five years of policies), all with different coverage provisions.

The insurance industry has attempted to address some of the insurance complexity by offering wrap-up policies such as owner controlled insurance programs (OCIPs) and contractor controlled insurance programs (CCIPs), in which all of the contractors on a project are required to obtain coverage through one program. 

Potential for Conflict of Interest

This concept works well in case of a single occurrence, such as a personal injury or property damage incident. All of the project contractors are covered under the same policy and, therefore, have the same interest and can be represented by the same lawyers. However, in construction defect cases, there are frequently issues that may affect the coverage provided under the policy. For instance, the type of damage may not be covered by the insurance, leaving the contractor responsible. If the damage is not covered, one contractor may want to argue another contractor is responsible. Consequently, a joint defense, even though agreed to in the contract, cannot ethically be provided by one law firm.

Most importantly, keep in mind that these issues need to be addressed before engagement with the owners concerning the alleged deficiencies.