- Does Your Coverage Give You Cover for Defective Work by Others? – read now
- Liquidated Damage Clauses – read now
Does Your Coverage Give You Cover for Defective Work by Others?
A commercial general liability, or CGL, policy is one of a number of insurance products that help protect against the risks associated with operating a business. Generally speaking, a CGL policy covers damages that the insured is legally obligated to pay for property damages or bodily injury that is caused by an “occurrence.” The policy usually defines an occurrence as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
A CGL policy will typically contain a number of exclusions that limit the coverage. The most notable is the “Your work” exclusion which eliminates coverage to repair or replace the insured’s own defective work. Absent other exclusions, however, courts generally hold that damages to a third party’s property is covered by a CGL policy unless it is not caused by an “accident.”
In Ohio Northern University v. Charles Construction Services, Inc., __ N.E. 3d __ (Oct. 9, 2018), Ohio Northern University entered into an $8 million contract with Charles Construction to build an inn and conference center. After the project’s completion, the University noticed that the project had experienced water intrusion from hidden leaks. During the subsequent repairs, additional structural defects were located, which resulted in more than $6 million in total damages.
The University sued the general contractor, which in turn sued its subcontractors. The general contractor also submitted a claim to its CGL carrier, claiming that the damages arose from the defective workmanship of one or more of its subcontractors which should be covered by its CGL policy. The insurer intervened in the lawsuit and sought dismissal, claiming that, while non-insured property was damaged, there was no “occurrence” triggering coverage because, under Ohio law, an “occurrence” must be an accident and poor or defective workmanship is not, legally speaking, an accident.
The Ohio Supreme Court agreed with the insurer. The court stated that CGL policies are not intended to protect companies from ordinary business risks; instead, they are intended to insure the risk of an insured causing property damage or bodily injury to another. However, the court noted, although there was damage to the property of another (the University), it was not the result of an accident. In the court’s view, an accident must involve “fortuity” or chance, and poor workmanship is not the result of fortuity. Thus, the CGL policy did not cover the GC’s claims, even though the damages were caused by one of its subcontractors.
The Ohio Northern court’s opinion sharply contrasts with most other jurisdictions, including Maryland, which holds that negligent work can constitute an accident and thus an occurrence sufficient to trigger CGL coverage where it causes bodily injury or property damage to another.
It is therefore crucial to identify the law that governs your CGL policy, which is not always easy. Here are a couple of hints that may help. First, look at the policy itself. Sometimes it contains a so-called “choice of law” provision that will identify what law governs. That is usually sufficient. Second, if the policy has no choice of law provision, look at the geographic location of the project and the parties. If they are all located in the same jurisdiction, that jurisdiction’s law will most likely apply to the policy. If, however, neither of these situations apply to your policy, you may want to consult a lawyer. The determination may become much more complicated.
If you have questions about your CGL policy or any other insurance coverage questions, please contact Wright, Constable & Skeen.
by Mike Stover
Liquidated Damages are generally defined as a specific sum of money expressly stipulated by the parties to a contract, in advance, as the amount of damages to be recovered by one party for a breach of the agreement by the other. Typically, a liquidated damages provision will establish a daily rate to be paid by the breaching party for each day the breach continues. For example, a clause in a construction contract might provide for $5,000 a day in liquidated damages for every day of delay. The provision is designed to represent an estimate of the actual damages that would be suffered by the non-breaching party. The amount will generally include some factor for consequential damage, such as lost profits and revenues, loss of use, extended conditions, additional fees that might be incurred, etc.
Liquidated damage provisions are intended to be used in circumstances where actual damages resulting from delay are difficult or impossible to anticipate. They are designed to represent the parties’ reasonable estimate of such damages so that the parties can avoid efforts to attempt to prove such damages in the event of a subsequent breach. Generally, most courts, including Maryland courts, will enforce a proper liquidated damage clause. The courts embrace the “freedom of contract” approach and reason that liquidated damage clauses should be enforced because the issue of potential damages to be sustained is better left in the hands of the parties who are best able to estimate such damages and because the parties are presumed to have taken such clauses into consideration in pricing the contracts they accept.
However, as a general rule, a liquidated damages clause will be deemed to be an unenforceable penalty if it is proven that: (1) there was an intent to deter or punish the breaching party, or (2) the stipulated amount was unreasonable in relation to foreseeable actual damages at the time of the contract. Thus, some courts hold that for a liquidated damage clause be valid: (1) the amount fixed as damages must be a reasonable forecast for the harm caused by the breach; and (2) the harm that is caused by the breach must be of a kind difficult to accurately estimate.
The question of whether a liquidated damage clause will be enforced or rejected as a penalty is a question of law for the court to decide. In addition, the determination of whether a particular clause in a contract is to be construed as providing for liquidated damages, or as a penalty, depends on the facts and circumstances in each case.
In most jurisdictions, if there is a valid liquidated damage provision, the damaged party will not be able to recover both liquidated damage and actual damages for the same breach. While the general rule is that liquidated damages and actual damages are mutually exclusive, it is important to keep in mind that actual damages may still be recovered for breaches other than those contemplated by the liquidated damages provision.
There are certain well recognized potential defenses to enforcement of liquidated damage clauses. In most jurisdictions, courts will not impose liquidated damages for delay after the date of substantial completion of the contract. In some cases, courts have held that where the contractor completely abandons the project the liquidated damage clause is not enforceable. In those cases, the courts have found that such provisions did not contemplate total abandonment and that upon abandonment the breaching party is no longer in control over the completion of the work. If the liquidated damage provision relates to delay in completion of the contract, excusable delays to the critical path outside of the control of both the contracting parties will bar enforcement of liquidated damages.
Similarly, a liquidated damages clause is not enforceable if the delay is due to the fault of the non-breaching party or due to the fault of one for whom they are responsible for. Courts routinely recognize that where one seeking to enforce a provision for liquidated damages is responsible for the failure of performance, or has contributed in part to it, the provision will not be enforced.
Another possible defense could be waiver. The right to enforce a liquidated damage provision can be knowingly and voluntarily either expressly or through actions or conduct waived. For waiver to constitute a defense the actions or conduct must demonstrate either an intent to relinquish its right to liquidated damages and/or be inconsistent with an intention to enforce that right. Waiver may result from a variety of circumstances, such as the non-breaching party’s: (1) encouragement of continued performance after breach without objection and without invoking the liquidated damages clause; (2) direction to perform extra work after the scheduled completion date; (3) failure to declare a default; or (4) failure to claim entitlement to liquidated damages prior to making final payment.
Before your contract includes a request for liquidated damages or you are requested to pay them, talk to your attorney to make sure they apply.
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