Construction Corner - April 2019

The recent Federal Court case of Praetorian Ins. Co. v. Axia Contracting, LLC, 2019 WL 1002939 (D. Colo. Mar. 1, 2019) serves as a potent reminder to Owners and Contractors on the importance of complying with their Builder’s Risk policy conditions. Praetorian involved a 3 million dollar fire loss at a construction site. The Owner and Contractor submitted the claim under their builder’s risk policy but the claim was denied - a denial upheld by the Court. Why? In exchange for a 10% savings on the policy, the Owner and Contractor agreed to implement certain "Protective Safeguards" on the job site. These safeguards included the erection of a six-foot perimeter fence with locked gates during non-working hours. The policy further disclaimed coverage for any losses that were a result of the Owner/Contractor’s failure to meet and maintain the safeguards. 

As you might have guessed, the Owner and Contractor never erected a 6-foot fence around the entire perimeter. The ensuing fire, which destroyed the construction site to the tune of 3 million dollars, was determined to have been caused by arson. Based on this finding, the insurance company denied coverage and filed a lawsuit seeking judicial approval of its denial. The Court found that the failure to erect the fence was a material breach of the insurance contract and, as a result, confirmed the insurance company's right to deny coverage for the loss.
 

Takeaway

Obviously, we all want to save money on premiums. However, where these savings are linked to additional obligations Owners and Contractors need to treat such obligations seriously. Regardless, all policies should be carefully reviewed on a regular basis. This is even more so when dealing with a new carrier. Experienced construction can help you with such review. 

Many players in the construction industry contend that the American Institute of Architects (AIA) Construction forms are biased towards design professionals and owners. Specifically, they feel the form contracts place heavy liability burdens on the shoulders of contractors while at the same time diminish the design professional and owners' overall responsibility for project failures. As a result, a group of contractors, subcontractors, owners and estimators created Consensus DOCS in 2007. Over the past decade, Consensus Docs have gained popularity here on the East Coast.

           While there are numerous differences between the two sets of documents, one crucial variance is in how each deal with indemnification. The AIA, through its most recent updates, enforces one-sided indemnity obligations upon the Contractor. (See sec 3.18 of A 201). Moreover, the indemnification language itself is fairly broad. In addition to requiring indemnification for claims arising out of the negligent acts or omissions of the Contractor, Subcontractors or their employees, AIA further requires indemnification even where the owner or the architect is equally at fault.

Conversely, Consensus Docs provide a mutual indemnity obligation between the Contractor and Owner. Further, Consensus Docs do not require indemnification where the Owner or Architect is alleged to have had a part in the claim.

This is just one example of how these two sets of Agreements differ. Other examples include payment terms, HazMat responsibility, termination procedure, claims and disputes and consequential damages.