An Owner’s and Contractor’s Protective Policy May Be Considered as an Addition to the Owners Insurance and Risk Management Plan
With a number of states limiting the coverage of an additional insured and limiting the breadth of indemnification clauses in construction contracts, a particular type of policy known as “Owner and Contractors Protective” (OCP) may be worth a look in evaluating that policy as a part of the overall risk management strategy. The OCP policy should not be confused with an OCIP—Owner Controlled Insurance Program—that provides for comprehensive insurance coverage for project participants. The OCP policy provides similar, but limited, coverage available under general liability policies, and the specific coverage will need to be scrutinized by an Owner’s insurance consultants prior to a blanket acceptance. The OCP policy is referenced in the ConsensusDOCS 200 at paragraph 10.5.2.2 and the 500 and 410 at paragraph 11.5.2.2 as an alternative to Additional Insured endorsements in favor of Owners on contractors’ general liability policies. While the OCP is an option, it has limitations that will need to be supplemented through other means. For example, the OCP policy typically only applies during the performance of the work and does not include Completed Operations coverage and may not cover personal injury claims; additionally, the contractor’s umbrella limits may not apply to OCP coverage. However, in states where the limitations on both indemnity and additional insured endorsements are severe, it will be worth discussing this particular policy with your insurance and risk management consultant to see if it may provide a level of protection not otherwise available.

Contract Language May Be Disregarded by the Courts if the Parties’ Behavior Is Inconsistent

Change Order requirements are in the contract for a reason— to protect the parties from misunderstandings concerning the performance, pricing, and payment for work that may be extra to the contract. Ignoring those requirements through an alternative course of performance can lead to the loss of any protections available under the contract relating to change orders. Even where the law may provide for a strict enforcement of notice requirements for changed conditions, an Owner’s consideration and acceptance of notice at variance from the contract requirements may constitute a waiver of that provision. Tripoli Management v Waste Connections of Kansas, Inc. (USDC Kansas, July 18, 2011).

Similarly, when an Owner verbally directs changes to be performed despite a contractual requirement for written changes, the Owner may convert the fixed price contract into a time and materials contract. In Lewistown Miller Construction v Miller (Montana Supreme Court, December 30, 2011), the Owner repeatedly directed the contractor verbally and through electronic mail to modify and increase the work to the point that the court observed that the contractual change order process was never used. The court found that the Owner waived the requirement for written change orders and could not refuse payment for the additional work.

Other cases have noted that an Owner’s termination of a contractor for cause may only occur upon certification of cause by the design profession when using the AIA family of contract documents. The AIA A201 in Article 9 also requires that the design professional review and approve the applications for payment as a condition for the contractor receiving payment from the Owner. However, when the Owner does not include the designer in the payment approval process, the Owner may not be able to rely on the absence of the designer’s approval in refusing payment to the contractor. In Town of Stratford v Secondino and Son (Connecticut Court of Appeals, February 12, 2012), the parties followed the payment approval process laid out in the contract documents until late in the project. After the design professional submitted its punchlist, the Owner and the contractor began dealing directly on the topic of payment. The Owner rather than the design professional signed the punchlist, and the court found that the design professional was effectively out of the procedure at that point. Therefore, the court found that the design professional’s approval of the final application for payment was not required.

The critical point to remember is to follow the contract terms through the completion of the project. If the contract does not reflect the way that an Owner wants a project administered, then the contract language needs to be changed. If the contract is at variance from the parties’ performance, the courts may revise the contract in a way that is not anticipated by the parties at the time the contract is executed.

Contract Language Can Determine the Level of Specificity of Claims Submittals

Despite the best efforts of project participants, claims sometimes happen. In many contract forms, the process for pursuing a claim is specified in varying levels of detail. The ConsensusDOCS forms lay out the procedure and the requirement for written documentation supporting the claim as in document 200 at paragraph 8.4, document 500 at paragraph 9.4, and document 410 at paragraph 9.6. Other contract language may be added to increase the level of detail and specificity required to be submitted in order to preserve or pursue a claim. When the Owner is a public entity, the particular requirements and level of detail may also be described in the state constitution and statutes.

In Excel Construction v Town of Lovell (Wyoming Supreme Court, December 20, 2011), the contractor submitted a Notice of Claim to the public officials, but the documents were missing a referenced “Exhibit A” containing an itemized statement of claim. Without Exhibit A, the documents submitted contained only a total amount claimed without any breakdown. Shortly after Excel Construction filed its lawsuit, Excel discovered the oversight and attempted to serve an Amended Notice of Claim on the officials, but the service occurred after the time period for service of the Notice had expired. The trial court dismissed Excel’s Complaint for failure to itemize its damages, but the Wyoming Supreme Court reversed and held that the critical fact is the amount they were requesting in damages; the level of specificity was not a Notice requirement.

However, while the initial notice of the claim may not require great specificity, justifying recovery may have a higher standard. The Virginia Court of Appeals in Commonwealth v AMEC Civil (May 22, 2012) required the contractor in calculating damages on a delay claim to use actual costs for the specific delay period rather than average costs over the project. The contractor was allowed to use the Blue Book to estimate some “actual costs” in some instances, but the court noted that the Blue Book was allowed because the parties did not challenge the contractor’s use in preparing the calculations. Since the contract expressly required “an actual cost record of the work,” which includes “an itemized list of materials, equipment, and labor” and “actual cost” for those items, the contractor was limited in its ability to estimate or average costs. The project overhead varied depending on the work being performed, but the court specifically rejected the “average” calculated by the contractor.

Because of this wide variation in monthly figures, we hold that, where proof of actual costs is expressly required by the parties’ contract and the record establishes the plaintiff maintained those figures on at least a monthly basis, the defendant is entitled to have those monthly amounts proved without averages calculated based on wholly different months, absent expert testimony or inferences therefrom, accepted by the fact finder, that averaging data from different months outside the damages period is an accurate method of calculating actual costs. Here, AMEC had ample opportunity to keep records of actual cost figures, and the record indicates it did so. To the extent AMEC failed to introduce evidence of all necessary monthly totals at trial, the express language of the contract and the Supreme Court’s instructions on remand bar AMEC from recovering any categories of damages for which its evidence to prove actual costs is insufficient.

The more specific the contract or statutory language pertaining to the character of supporting information, the more precise the claims submitted by the contractor must be. However, that alone will not prevent claims; the behavior of the project participants is a great influence on the likelihood of claims.

A Project Owner May Perform an Independent Investigation of a Bidder’s Qualifications

A bidder will submit a statement of qualifications along with its bid or an Owner may already have access to a database of prior projects and qualifications relating to a particular bidder, but that access may not necessarily preclude the Owner from performing a further independent investigation of a bidder’s qualifications and work history. In Barr Incorporated v Town of Holliston (Massachusetts Supreme Court, May 3, 2012), Holliston had access to the database maintained by the Department of Capital Asset Management (DCAM) relative to the contractor certification process. On reviewing various bids, Holliston also conducted an Internet search and located projects that were not contained in the DCAM database, and some of those other projects raised concerns about Barr’s performance on other projects. Holliston directed a detective in the police department to conduct a more thorough investigation that resulted in Holliston finding that Barr was not a responsible bidder.

Barr sued asserting that Holliston was not permitted to perform an investigation outside of the materials contained in the DCAM database since the materials form the basis of the certificate of eligibility allowing contractors to bid on public projects. However, the Court rejected that constraint and found that each awarding authority must determine who the lowest responsible and eligible bidder is; therefore, each awarding authority is permitted to perform its own independent investigation of the bidders to satisfy itself of the prudence of any contract award.

 

John Sier leads the construction and commercial litigation group of Kitch Drutchas Wagner Valitutti & Sherbrook in Detroit, Michigan, and concentrates his practice in dispute avoidance and resolution of commercial, health care and construction contract issues.