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Construction In Brief: Winter 2008

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Cohen Seglias Pallas Greenhall & Furman PC
CONSTRUCTION IN BRIEF

Winter 2008 Issue


Cover Story:Millers Capital Insurance Co. v. Gambone Brothers Development Co.
There’s A Bad Moon Rising in PA 
         -  by Jonathan A. Cass, Esq.

You are a residential builder in Pennsylvania being sued by a homeowner who claims that windows you installed have extensive water infiltration and damage to the home’s sheathing, framing, and interior finishes. You send the Complaint to your insurance broker expecting your carrier to hire a lawyer to defend the company, and to pay for any settlement or verdict.

This time, however, instead of receiving a letter from your insurance carrier accepting the claim and identifying defense counsel, you receive a letter stating that the claim is not an “occurrence,” and as a result, there is no coverage under your policy.

What happened? In Millers Capital Insurance Company v. Gambone Brothers Development Co., the Pennsylvania Supreme Court recently gave insurance companies what they may consider carte blanche to deny the type of claim discussed above, even though they previously covered these claims.

In this case, Gambone built two residential developments in Chester and Montgomery counties, and was insured under a commercial general liability policy that Millers issued. A group of homeowners from the first development sued Gambone alleging that their homes had extensive water leaks due to “construction defects and product failures” in, among other things, the homes’ vapor barriers, windows, roofs and stucco exteriors. After an arbitration and an award of $1.146 million to the homeowners, Millers refused to provide coverage for the award.

At the same time, a homeowner in the second development sued Gambone for installing a defective stucco system. Millers again refused to provide coverage. Gambone and Millers filed suits against each other seeking a determination as to whether there was coverage for the arbitration award and the second lawsuit. Gambone lost before the trial court and appealed to the Superior Court.

The Superior Court sided with Millers and declared that there was no coverage under the insurance policy for either the arbitration award or the second lawsuit. The court based its decision on its conclusion that the claims did not constitute an “occurrence” as defined in the policy.

Gambone’s policy, which is similar to most commercial general liability policies, provided that there would be coverage when a claim arises from “bodily injury” or “property damage” caused by an “occurrence.” If the claim does not constitute an “occurrence,” there is no coverage. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same or general harmful conditions.”

Gambone argued that the lawsuits brought by the homeowners did not merely involve claims for faulty workmanship, but also involved claims for ancillary and accidental damage caused by the resulting water damage to non-defective work inside the home. According to Gambone, the resulting water damage constituted an “occurrence,” even though the damage to the faulty stucco exteriors did not. The Superior Court disagreed explaining that the damage caused by the rainwater seepage was not an “accident,” and therefore there was not an “occurrence” for the purposes of insurance coverage. It held that “damage caused by rainfall that seeps through faulty home exterior work to damage the interior of a home is not a fortuitous event that would trigger coverage.”

In reaching this conclusion, the court relied on the Pennsylvania Supreme Court’s decision in Kvaerner v. Commercial Union Insurance Company. That declaratory judgment action arose from a lawsuit against Kvaerner, who had designed and installed a coke oven battery. In the underlying action, the owner of the battery sued Kvaerner alleging that the battery was damaged, and that Kvaerner had failed to construct the battery to the contract specifications. After Kvaerner’s insurance carriers denied coverage for the entire claim, Kvaerner filed suit against them seeking coverage.

In that suit, Kvaerner asserted that the battery had been damaged because of roof movement caused by bricks in the roof being grouted too early, and unexpected “monsoon-type rains.” It argued that because it had not intended or expected the early grouting of the battery’s bricks or the rains to cause the movement in the roof, the damage to the cook battery had been the result of an “accident,” and thus fell within the definition of an “occurrence” within the meaning of the policies. The court rejected Kvaerner’s argument, and sided with the insurers finding that Kvaerner could not establish an “occurrence” under the policies because the claims arose from faulty workmanship. According to the court, “[t]o hold otherwise would be to convert a policy of insurance into a performance bond.”

What is the significance of the Kvaerner and the Millers decisions? The Pennsylvania Supreme Court, and now the Pennsylvania Superior Court, have permitted insurance carriers to deny coverage for property damage claims that arise from faulty workmanship by narrowly construing what is considered an “occurrence.” In those decisions, the court has concluded that damage resulting from the insured’s faulty workmanship do not give rise to coverage under a standard general liability policy.

However, the underlying lawsuits brought by the owners of the property that led to Kvaerner and Millers did not include negligence-based claims. In Kvaerner, the owner only sued for breach of contract, and in both lawsuits filed by the homeowners in Millers, all the negligence (and other tort-based claims) were dismissed. This distinction may provide an opening for insureds to seek coverage for property damage claims arising from faulty workmanship that have been pled in negligence or in tort-based causes of action.

It appears as though insurance carriers will now move aggressively to deny new claims that arise from allegations of faulty workmanship, and to revisit old cases involving claims of faulty workmanship where the carrier is currently defending and/or indemnifying its insureds.

It is important, however, that you continue to submit property damage claims that arise from faulty workmanship to your insurance carrier. To the extent that the carrier provides coverage, it is important to discuss with defense counsel appointed by the insurance carrier the potential negative coverage implications if the tort-based claims (i.e., for example, a claim for negligence) asserted in the complaint are dismissed.


Labor & Employment Law:
Picketing Season is Here
               -- by Marc Furman Esq.

It’s that time of the year. The traditional winter weather-induced slow down has faded and construction work begins picking up. To many clients, it also means an increased risk or incidence of picketing. To prepare for this annual rite of Spring, it is helpful to review what picketing is, what it isn’t, and what to do when faced with it.

WHAT IT IS
Simply put, picketing is the advertisement of a dispute. A person (“picket”) patrols individually or in a group, carrying a placard (“picket sign”) on which the “object of the dispute”, namely, the targeted contractor, is identified. It is important to note that picketing, in and of itself, is lawful and protected Free Speech under the Constitution. In fact, there are even statutes, appropriately titled anti-injunction acts, which specifically prohibit courts from issuing injunctions in labor disputes! Only in limited circumstances are courts empowered to issue injunctions to limit the scope of the picketing in a labor dispute. Notice, I did not say, to prevent the picketing.

There are several types of picketing, each with its own purpose and subsequent limitations:

- “Recognitional” picketing is designed to pressure the targeted employer into “recognizing” the union as the representative of the employer’s employees in an appropriate bargaining unit.

- “Organizational” picketing is directed at the employees, not the employer. It is designed to encourage those employees to sign up and authorize the union to represent them against their employer when dealing with terms and conditions of employment.

- “Economic” picketing is generally accompanied by striking (as defined below) where the purpose is to place pressure on the employer to give in to the union’s economic demands associated with negotiating an initial or renewal collective bargaining agreement (“CBA”).

- “Jurisdictional” and “Area Standards” are the two most common forms of picketing encountered at construction job sites. Jurisdictional picketing involves one union picketing the job site contending that the specific contractor involved is using employees represented by a different union. In such circumstances, charges can be filed with the National Labor Relations Board (“NLRB”) to resolve this inter-union dispute. Area Standards picketing is when the union advertises to the general public its belief that the contractor does not pay the equivalent wages and benefits to its employees as a union-signatory contractor would be obliged to pay under the terms of the union’s CBA.

WHAT IT IS NOT
Picketing is not “handbilling”. Lawful handbilling is also an exercise of Free Speech and involves only the peaceful distribution of leaflets or pamphlets by hand. “Aggressive” handbilling looses its protected status.

Picketing is not “striking”. In its simplest form, striking is the withholding of services — an employee merely refuses to work. Yes, it is possible that employees could walk off the job, pick up a picket sign and begin patrolling in front of the construction site or the employer’s facility. But the rules of striking are more involved.

WHAT SHOULD YOU DO?
Be prepared. Presume that there is a possibility or likelihood of picketing on all projects or whenever a CBA is to be negotiated. Have all contracts with the owner/customer, sub-contractors, suppliers, design professionals, etc., reviewed in advance with competent construction counsel, to make clear the responsibilities and obligations in connection with a possible work stoppage due to a labor dispute.

A properly established and maintained reserved gate system will require that the picketing be limited to a particular gate earmarked for the targeted employer. Experienced labor counsel can provide you with the necessary gate posting language and appropriate letters needed to place all relevant parties on notice. It is important to note that even a peaceful picketing situation may nevertheless be unlawful where a union pickets at the wrong gate.

Whenever picketing has been threatened or actually occurs, contact the local police so that they may properly counsel the pickets concerning the extent of their lawful actions.

This year, where there has been a perceived, if not actual, reduction in work availability, the likelihood of picketing is stronger than in recent years past. So, be prepared!


Q&A: With The Business Practice Group
A Look at Bankruptcy Law & Interest Rates 
               -- by Steven D. Usdin, Esq.

What should your company do if an employee has filed a bankruptcy proceeding?

Oftentimes, employers are faced with questions about their rights and obligations regarding an employee who may have filed a bankruptcy proceeding.  Individuals have the right to file several types of bankruptcy proceedings.  The first, Chapter 7, is a liquidation of the assets of the employee, where a trustee is appointed and administers the assets of the employee for the benefit of the employee’s creditors.

Chapter 13, on the other hand, provides the opportunity for the employee to propose a payment structure and plan for repayment, in part, of the amounts and funds owed to the creditors of the employee.  Those funds are usually paid over a period from between three to five years in monthly payments.  As an employer of an individual who has filed a bankruptcy proceeding, your responsibilities are the following:

1.  Continue to pay the employee his or her wages pursuant to any applicable Employment Agreement or contract with your company.

2.  Continue to provide fringe benefits and related expenses owed to the employee for services rendered.

3.  Be prepared to file a Proof of Claim in the bankruptcy case, in the event that the employee owes your company for any advances made to the employee, including expense advancements and the like, for which the employee has not performed the services agreed to.

4. Speak to the employee to discuss whether the employee is subject to any type of court order payments such as alimony, child support, or payment on judgments, and prior to making any additional payments, seek advice from counsel in regard to whether to continue making payments of that sort.


Should your company consider refinancing its loan package?

As the economy continues to struggle, interest rates are continuing to drop.  Now might be the opportune time for your company to look at its financial/loan packages, with a view toward benefiting from these rate reductions.
                       
Any reduction in interest rates benefits the company by (i) increasing available cash, (ii) providing the chance to borrow additional amounts without increasing your monthly payments, or (iii) making funds available to drop to the bottom line.  Oftentimes, companies do not consider refinancing their existing debt and, therefore, deprive themselves of the benefits that a lower interest rate might provide.

Remember, when refinancing your financial/loan packages, a capable lawyer should work with your company in reviewing any documents being proposed by the lender, and finalizing the terms and conditions of any refinance package that your company might be considering. 

Question for our Business Practice Group?
Submit it to Janet L. Treiman, our editor, and you might just see it appear in this column.


Construction News:
CONTRACTORS BEWARE:
Pennsylvania Court Paves Way for Public School Single-Prime Contracts
               -- by Lance S. Forbes, Esq.

The last time that you bid a public school construction project in Pennsylvania, it was likely a multi-prime contract. It may well be, that may have been the last time that you will ever bid a multi-prime public school construction project. Why? A recent court ruling has paved the way for single-prime contracts for Pennsylvania public school construction projects.

Multi-prime contracts have been the accepted practice in Pennsylvania since the Commonwealth enacted the Separations Act of 1913, which required that all public works construction projects be put out to bid to separate prime contractors. As construction projects, including school projects, have become more complex over time, some in the construction industry have developed the perception that the multiple-prime delivery system was proving to be more costly and less effective than the single-prime system. Consequently, in 2000, the General Assembly in Harrisburg passed legislation referred to as the Mandate Waiver Program, which permitted public schools to obtain waivers from the Department of Education to the multi-prime contracting requirement under the School Code.

In the years between 2000 and 2003, the Department of Education granted these waivers to dozens of schools until several contractors filed a lawsuit in 2003 challenging the waiver program. The court ruled in favor of the contractors, striking down the waiver program. However, general contractors and their supporters filed an appeal in the case of Mechanical Contractors Association of Eastern Pennsylvania, Inc. v. Commonwealth of Pennsylvania Department of Education, et al.

In November of 2007, the Pennsylvania Supreme Court issued a decision in which it found that the Separations Act was subject to the Mandate Waiver Program and reversed the lower court’s decision, effectively reinstituting the waiver program. As a result, school districts can once again seek a waiver of the multi-prime contracting requirement and employ a single-prime delivery system.

Proponents of the waiver program maintain that single-prime contracting on public schools is more efficient and less costly, thereby saving the districts and taxpayers millions of dollars. They contend that with a single general contractor, charged with the task of overseeing its subcontractors; greater coordination and efficiency is guaranteed on the project.

Detractors on the other hand, contend that the savings are not guaranteed and that the single-prime bidding process is not as transparent as multi-prime bidding. Just as troublesome to the subcontractor on a single-prime job is the prospect of having to deal with a general contractor and rely on that contractor for payment, instead of being able to deal directly with the owner. The critics of the waiver program, therefore, praise the multi-prime contracting arrangement for eliminating an extra layer with which the subcontractor has to deal to get paid and for changes on the project.

The waiver program is in effect until June 30, 2010. So, at least until then, expect many school districts to seek a multi-prime waiver and employ single-prime delivery systems. Without a doubt, bid requests will also begin to reflect more single-prime contracting arrangements, effectively relegating many traditional prime contractors to acting as subcontractors. .

What's New At The Firm?
  
-- by Edward T. DeLisle, Esq.


Cohen Seglias is pleased to announce that we have named six attorneys as partners of the firm. .

Lane F. Kelman is a member of the firm’s Construction Group. He graduated from The Pennsylvania State University with a B.A. in Labor and Industrial Relations and received his J.D. from the Detroit College of Law, Michigan State University, magna cum laude.

Janet L. Treiman is a member of the firm’s Construction Group. She graduated with High Honors from The Pennsylvania State University with a B. A. in Political Science and cum laude from the University of Pittsburgh School of Law.

Kevin B. Watson is a member of the firm’s Construction Group. After graduating from the University of Kentucky with B.S. degrees in Civil and Mining Engineering, Kevin received his J.D. from the University of Kentucky, where he served as a founding editor of the university’s Journal of Mineral Law and Policy.

Jonathan Landesman is a member of the firm’s Labor and Employment Group. After graduating from Boston University, he received his J.D. from Fordham University School of Law.

Lonny S. Cades is a member of the firm’s Business Practice Group. He received his B.A. in Political Science from Dickinson College. Lonny received his J.D. and LL.M. from Villanova University School of Law.

Wayne C. Buckwalter is a member of the firm’s Business Practice Group, practicing innovative estate and business succession planning. Wayne received his B.A., cum laude, from Villanova University and his J.D., cum laude, from the Villanova University School of Law.
 

Words From Our Editor:
               -- by Janet L. Treiman, Esq.

Welcome to the Winter 2008 edition of Construction in Brief. This year we are celebrating the 20th anniversary of Cohen Seglias. There will be a special Spring issue to commemorate this milestone.

Over the past 20 years, we have strived to educate our clients regarding significant changes in the law, especially the laws that affect their businesses. In this edition, we continue to provide this service with articles addressing developments in the interpretation of general liability insurance coverage and the use of multi versus single-prime contracts for public school construction in Pennsylvania.

As always, we welcome you to submit suggestions for future articles that may be of interest to you, either by regular mail or e-mail at:   JTreiman@cohenseglias.com

Remember, if you have a specific legal concern, we recommend that you consult with counsel so that you may receive the best advice.  Thanks for reading, and we’ll see you next issue!

There’s A Bad Moon Rising in PA

By Jonathan A. Cass

You are a residential builder in Pennsylvania being sued by a homeowner who claims that windows you installed have extensive water infiltration and damage to the home’s sheathing, framing, and interior finishes. You send the Complaint to your insurance broker expecting your carrier to hire a lawyer to defend the company, and to pay for any settlement or verdict.

This time, however, instead of receiving a letter from your insurance carrier accepting the claim and identifying defense counsel, you receive a letter stating that the claim is not an “occurrence,” and as a result, there is no coverage under your policy.

What happened? In Millers Capital Insurance Company v. Gambone Brothers Development Co., the Pennsylvania Supreme Court recently gave insurance companies what they may consider carte blanche to deny the type of claim discussed above, even though they previously covered these claims.

In this case, Gambone built two residential developments in Chester and Montgomery counties, and was insured under a commercial general liability policy that Millers issued. A group of homeowners from the first development sued Gambone alleging that their homes had extensive water leaks due to “construction defects and product failures” in, among other things, the homes’ vapor barriers, windows, roofs and stucco exteriors. After an arbitration and an award of $1.146 million to the homeowners, Millers refused to provide coverage for the award. 

At the same time, a homeowner in the second development sued Gambone for installing a defective stucco system. Millers again refused to provide coverage. Gambone and Millers filed suits against each other seeking a determination as to whether there was coverage for the arbitration award and the second lawsuit. Gambone lost before the trial court and appealed to the Superior Court.

The Superior Court sided with Millers and declared that there was no coverage under the insurance policy for either the arbitration award or the second lawsuit. The court based its decision on its conclusion that the claims did not constitute an “occurrence” as defined in the policy.

Gambone’s policy, which is similar to most commercial general liability policies, provided that there would be coverage when a claim arises from “bodily injury” or “property damage” caused by an “occurrence.” If the claim does not constitute an “occurrence,” there is no coverage. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same or general harmful conditions.” 

Gambone argued that the lawsuits brought by the homeowners did not merely involve claims for faulty workmanship, but also involved claims for ancillary and accidental damage caused by the resulting water damage to non-defective work inside the home. According to Gambone, the resulting water damage constituted an “occurrence,” even though the damage to the faulty stucco exteriors did not. The Superior Court disagreed explaining that the damage caused by the rainwater seepage was not an “accident,” and therefore there was not an “occurrence” for the purposes of insurance coverage. It held that “damage caused by rainfall that seeps through faulty home exterior work to damage the interior of a home is not a fortuitous event that would trigger coverage.”

In reaching this conclusion, the court relied on the Pennsylvania Supreme Court’s decision in Kvaerner v. Commercial Union Insurance Company. That declaratory judgment action arose from a lawsuit against Kvaerner, who had designed and installed a coke oven battery. In the underlying action, the owner of the battery sued Kvaerner alleging that the battery was damaged, and that Kvaerner had failed to construct the battery to the contract specifications. After Kvaerner’s insurance carriers denied coverage for the entire claim, Kvaerner filed suit against them seeking coverage.

In that suit, Kvaerner asserted that the battery had been damaged because of roof movement caused by bricks in the roof being grouted too early, and unexpected “monsoon-type rains.” It argued that because it had not intended or expected the early grouting of the battery’s bricks or the rains to cause the movement in the roof, the damage to the cook battery had been the result of an “accident,” and thus fell within the definition of an “occurrence” within the meaning of the policies. The court rejected Kvaerner’s argument, and sided with the insurers finding that Kvaerner could not establish an “occurrence” under the policies because the claims arose from faulty workmanship. According to the court, “[t]o hold otherwise would be to convert a policy of insurance into a performance bond.”

What is the significance of the Kvaerner and the Millers decisions? The Pennsylvania Supreme Court, and now the Pennsylvania Superior Court, have permitted insurance carriers to deny coverage for property damage claims that arise from faulty workmanship by narrowly construing what is considered an “occurrence.” In those decisions, the court has concluded that damage resulting from the insured’s faulty workmanship do not give rise to coverage under a standard general liability policy.

However, the underlying lawsuits brought by the owners of the property that led to Kvaerner and Millers did not include negligence-based claims. In Kvaerner, the owner only sued for breach of contract, and in both lawsuits filed by the homeowners in Millers, all the negligence (and other tort-based claims) were dismissed. This distinction may provide an opening for insureds to seek coverage for property damage claims arising from faulty workmanship that have been pled in negligence or in tort-based causes of action.

It appears as though insurance carriers will now move aggressively to deny new claims that arise from allegations of faulty workmanship, and to revisit old cases involving claims of faulty workmanship where the carrier is currently defending and/or indemnifying its insureds.

It is important, however, that you continue to submit property damage claims that arise from faulty workmanship to your insurance carrier. To the extent that the carrier provides coverage, it is important to discuss with defense counsel appointed by the insurance carrier the potential negative coverage implications if the tort-based claims (i.e., for example, a claim for negligence) asserted in the complaint are dismissed.