SHB 1559 revises RCW 4.24.115(1) in three important ways.  First, revised RCW 4.24.115(1) expressly applies to “a contract or agreement for architectural, landscape architectural, engineering, or land surveying services.”  The second change to RCW 4.25.115 in SHB 1559 eliminates a party’s “duty and cost to defend” claims arising out of another party’s negligence.  The final change in SHB 1559 provides that RCW 4.24.115(1) applies to damages arising out of “services” in addition to personal injury or property damage.

SHB 1559′s revisions to RCW 4.24.115 take effect on June 7, 2012.  As a result of these upcoming changes to RCW 4.24.115, building owners and developers, contractors and design professionals—including architects, engineers, landscape architects and surveyors—should probably review and revise the indemnification provisions in their contracts with the assistance of counsel and as necessary to comply with the new statutory changes.

Standard form commercial general liability (“CGL”) policies typically cover “property damage” caused by an “occurrence,” which often is defined as “an accident, including continuous or repeated exposure to substantially the same harmful conditions.”  CGL policy forms contain so-called “business risk” exclusions, designed to bar coverage for claims arising out of the policyholder’s failure to perform its job properly.  See, e.g., Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 81-82 (Wis. 2004).

The basic concept embodied within these exclusions is that insurance companies will not pay for the cost of correcting the defective performance of the policyholder, but will extend coverage when that defective work leads to unexpected or unintended harm to persons or other property.  As one court described it, the liability of a policyholder to fix a wall it built poorly would be excluded, but if a piece of the poorly built wall falls and harms other property, the resulting liability would be covered.  Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791-92 (N.J. 1979).  The business risk exclusions have received considerable attention and revisions over the years, and contain a number of exceptions outlining situations where they do not apply.  See, e.g., Am. Girl, 673 N.W.2d at 82-83.

Insurance companies, however, often seek to read these exceptions out of the policies they sold, by asserting that faulty workmanship can never be an “occurrence,” on the grounds that such a breach can never be an accident, and thus no construction defects claims fall within coverage in the first place.  Courts throughout the country are split on this issue.  Some courts have agreed  See, e.g., Group Builders, Inc. v. Admiral Ins. Co., 231 P.3d 67, 73 (Haw. 2010) (“We hold that under Hawai’i law, construction defect claims do not constitute an ‘occurrence’ under a CGL policy.”).  Other courts, however, have rejected such attempts.  See, e.g., Am. Girl, 673 N.W.2d at 73-84 (Where subcontractor exception to business risk exclusions applied, the damage to a building by a subcontractor’s faulty soil preparation work arose out of a covered “occurrence.”); Acuity v. Society Ins. Co., 2012 WL 15376 (Wis. App. Jan. 5, 2012) (Business risk exclusions applied only to exclude damage to “that particular part” of the property contractor worked on, and damage to other parts of the building caused by faulty workmanship while rebuilding a wall was the result of a covered “occurrence.”).

As a response, four state legislatures recently have taken action to preserve the coverage policyholders purchased from the insurance companies’ overbroad assertions that construction defects can never arise out of a covered occurrence.  In reaction to the Group Builders decision, the Hawaii legislature passed a statute requiring courts to construe the term “occurrence” in accordance with the law at the time the policy was issued, protecting existing insurance coverage from the overly narrow reading in Group Builders.  HRS § 431:1-217.  Colorado has gone further, creating a statutory presumption that a construction defect is an accident.  C.R.S.A. 13-20-808.  In addition, both Arkansas and South Carolina have passed statutes requiring CGL policies to contain a definition of “occurrence” that would include property damage or bodily injury arising out of faulty workmanship.  See A.C.A. § 23-79-155; SC ST § 38-61-70.  While insurance companies still will include “business risk” exclusions in their policies that will bar faulty workmanship claims when the language of those exclusions apply, these statues will limit insurance company’s ability to deny coverage for claims that are not reached by those exclusions.  At a minimum, the new legislation should assist policyholders in establishing the potential existence for coverage and therefore the insurance company’s duty to defend.

These statutes obviously protect the policyholders in these particular states.  Policyholders in other states may also be able to benefit from them:  When renewing their coverage, policyholders should request that their policies be endorsed to include the language the insurance industry uses in order to comply with theArkansasandSouth Carolinastatutes.  Such language could help all policyholders avoid the possibility that the courts of their own state will read the traditional “occurrence” definition too narrowly and negate the coverage that the policyholder purchased.

In Pacific Continental Bank v. Soundview 90, the Bank provided construction financing to Soundview 90 to purchase and build apartments.  Soundview 90 hired Village Framers to perform wood framing.  After Soundview 90 failed to pay Village Framers, Village Framers recorded a $385,465.48 lien and served the Bank with a stop notice.  The notice informed the Bank of its statutory obligation to withhold from the next and future construction draws the amount of $385,465.48 or have its security interest in the property subordinated to the lien.

Rather than hold back the claimed amount from a future draw, the Bank created a “reserve fund” of $400,000 to account for the liened amount.  The Court found this action insufficient.  Holding that the “stop notice provision’s meaning is plain on its face,” the Court ruled that RCW 60.04.221 “required the Bank to withhold the amount [Village Framers] claimed to be due from ‘the next and subsequent draws’ to maintain its priority.”  Because the Bank failed to do so, its deed of trust was subordinated to Village Framers’ lien.

To read the entire opinion, click here.

Currently, there are four states that provide a bidding preference to resident contractors who bid on public works contracts:  Alaska, Nevada, New Mexico and Wyoming.  To address this unfairness, Enterprise Services will add a reciprocal disadvantage to all public works bids submitted by contractors from those states.  The disadvantage amount will be equal to the advantage given by the state with the bidding preference.

Example:

Since 1991, the City has reported the awarding of more than $9.5 billion in City contracts to M/WBEs, or an average of 35% of the total contracts awarded.  Studies by the Better Government Association have documented abuses of the program.  The City’s own website documents this history.  The United States Attorney has successfully prosecuted individuals and firms under racketeering statutes for using front companies to procure M/WBE contracts.  Recently, the U.S. Attorney announced the indictment of several individuals and companies charged with fraudulently procuring M/WBE subcontracts on $200 million in public works construction contracts in Chicago.  The prime contractor was not charged in the indictments, but is alleged to have hired the charged persons “as part of a scheme to help prime contractors meet [City and other governmental] set-aside requirements for construction contracts.”

After the indictments, Chicago Mayor Rahm Emanuel announced that the City would allocate $11 million received from a settlement with another City contractor over M/WBE contracts to a program to develop and improve the City’s M/WBE compliance efforts.  The City program will expand and accelerate the implementation of oversight functions by the City’s Department of Procurement Services.  The program will strengthen compliance through unannounced visits to the City’s work sites, changing certification regulations, especially those relating to background information, training contractors in compliance, and increasing the budget for DPS’s contract monitoring division.  DPS’s Commissioner Jamie Rhee stated that the increased funding from the settlement would enable the City to “implement . . . reforms more rapidly and thoroughly.”

Predicting the impact of Elcon on future cases is difficult because the opinion blends its discussion of what was formerly referred to as the “economic loss rule” with what the Court now calls the independent duty doctrine.  For example, while the opinion states that “[w]e hold the economic loss rule has no application under the facts of this case,” it also states “[u]nder these circumstances, the independent duty doctrine does not apply.”

The continued use of the term “economic loss rule” in Elcon is puzzling because the lead opinions in Eastwood v. Horse Harbor Foundation, Inc., 170 Wn.2d. 380 (2010) and Affiliated FM Insurance Co. v. LTK Consulting Services, Inc., 170 Wn.2d 442 (2010), adopted the term “independent duty doctrine” in place of the “economic loss rule.”   See, e.g., Eastwood, 170 Wn.2d at 402 (“Because the term ‘economic loss rule’ inadequately captures this principle, we adopt the more apt term ‘independent duty doctrine.’”); Affiliated FM Ins. Co., 170 Wn.2d at 449 (stating “the court must apply the principle of Washington law that is best termed the independent duty doctrine.”).

This point was emphasized by Chief Justice Madsen in her concurring Elcon opinion, which criticized:

[The] majority’s mistaken statement that the ‘independent duty rule’ was formerly known as the ‘economic loss rule,’ as if the two are and have been the same. . . . This is not the case, and it will only add to the confusion engendered by this new rule. . . . The economic loss rule is unlike the ‘independent duty rule’ that has been described in recent opinions. [citing Affiliated FM and Eastwood].  The economic loss rule defaults to contract remedies where both are available.  The ‘independent duty rule’ defaults to tort remedies.

What does seem clear from Elcon is that Justice Chambers’ concurring Eastwood opinion has emerged as the foundation for Court’s formulation of the independent duty doctrine.  Notably, in describing the independent duty doctrine in Elcon, the Court quoted from Justice Chambers’ Eastwood opinion three times, including the Court’s definition that “[t]he independent duty doctrine is ‘an analytical tool used by the court to maintain the boundary between torts and contract.’”

Among other arguments, Mabey had claimed that the Buy America Act preempted the Pennsylvania state law, and that, as such, the federal law’s broader exemptions to using foreign products in public projects should apply.  According to the opinion, the Buy America Act only bans the use of foreign steel as a permanent part of the project, whereas Mabey’s bridges are temporary construction.  The Third Circuit concluded that rather than attempting to set a uniform standard throughout the country, the Buy America Act was meant to let states add more stringent restrictions on the use of foreign steel.  “The statutory language, far from demonstrating an intent to preempt state law, instead demonstrates that Congress was aware that individual states may have more stringent requirements than the Buy America Act, and specifically instructed the Secretary of Transportation not to interfere with those requirements,” the Court wrote. “Such an instruction is tantamount to congressional authorization for more stringent state practices to continue.  Under such circumstances, there can be no preemption.”

In 2010, the Wisconsin Court of Appeals ruled that this definition of pollutants was ambiguous and thus — given the accepted insurance policy concept that ambiguous policy terms, especially in exclusions, are to be interpreted in favor of coverage — concluded that the Hirschhorns were entitled to coverage.  This week, however, the Wisconsin Supreme Court overruled the Court of Appeals and ruled that the term “waste” in the definition of pollutants unambiguously included the bat guano.  This outcome apparently was at least in part influenced by the Hirschhorns conceding (see footnote 6 of the court’s opinion) that a reasonable person buying insurance might conclude that human excrement fell within the pollution exclusion.   Two justices dissented; they asserted that the full context of the exclusion must be considered.   The dissenters observed that, while “waste” in isolation sometimes includes excrement, when considered in the context of the other terms in the exclusion (i.e., smoke, soot, fumes, etc.), the term becomes at least ambiguous as to whether bat guano is included within the exclusion.

The letter provides an interesting history regarding the enactment of the 2010 Standards and how the DOJ has historically enforced similar requirements.  The DOJ confirmed that the 2010 Standards do not change the longstanding requirement that public accommodations (e.g., owners, operators, lessors and lessees of hotels, resorts, swim clubs, and sites of events open to the public) remove physical barriers in existing buildings and facilities to the extent that it is “readily achievable” to do so (i.e., “easily accomplishable and able to be carried out without much difficulty or expense”).  Instead, the 2010 Standards add “supplemental requirements” clarifying the requirement to remove barriers.

The American Hotel & Lodging Association had sought guidance on how to define “readily achievable.”  Unfortunately, rather than provide a bright line test, the DOJ affirmed “that the determination as to whether the removal of a specific barrier is readily achievable must be made on a case-by-case basis after a thorough consideration of the factors established in the statute.”  These factors include:

• The nature and cost of the action;
• Overall resources of the site or sites involved, the number of persons employed at the site, the effect on expenses and resources, legitimate safety requirements that are necessary for safe operation, including crime prevention measures, and the other impact upon the operation of the site;
• The geographic separateness and relationship of the site(s) to any parent corporation or entity;
• The overall resources of any parent corporation or entity, if applicable; and
• If applicable, the type of operation or operations of any parent corporation or entity.

What this means, practically, is that the question of whether removal is required will continue to be fact intensive and case specific.  As with all issues associated with the ADA, consultation with experts is recommended.