California: Workmanship still not insured under standard Commercial General Liability policies

Tamara Boeck, writing for the Stoel Rives blog, Ahead of Schedule, has written an excellent analysis on a very important appellate decision in the state of California. The case: Regional Steel Corporation v. Liberty Surplus Insurance Corporation (PDF) (May 16, 2014, No. BC464209) Cal.App.2d. [2014 WL 2643242]

The facts of this dispute are not unfamiliar, and could be substituted for many projects by changing the name, location, and nature. Here, the owner/GC of a 14-story mixed-use apartment project hired a subcontractor to erect the steel and another subcontractor to pour concrete.

The owner also retained Quality Assurance, presumably, to do just that. As a part of the construction process, the steel subcontractor (Regional) submitted shop drawings during a four-month period. The owner/GC and the owner’s engineer approved the drawings, which identified two types of seismic hooks. Four months after the last shop drawing approval, the City issued a correction notice requiring the exclusive use of only one type of hook. The owner became aware of the problem four months after the correction notice, and thereafter stopped further concrete pours until the hook issue was resolved.

The City then notified the owner/GC that the first three levels and part of the fourth level of the building had defective hooks and required repairs. The owner/GC withheld $545,000 of Regional’s progress payments as a result. Not surprisingly litigation followed, including a claim against Regional for the defective hooks, the engineer for approving the shop drawings, the concrete subcontractor for not catching Regional’s error, and Quality Assurance for, well, not providing quality assurance.

The owner/GC alleged that it was damaged because completion of the project was delayed, resulting in loss of use, loss of rental income, and other damages. Thereafter, the owner/GC filed a first amended cross-complaint adding claims based upon theories of negligence and negligent interference with economic advantage, and asserted claims against the parties’ performance bonds.

Ultimately, the insurer denied coverage for Regional (the contractor) because there was no evidence established of resultant damage. This is a critical element in construction defect claims in the state of California, and unfortunately, poorly understood in the building industry outside of the realm of construction defect litigation.

The actual workmanship of a contractor is not covered by standard CGL policies, unless it results in damage to another component. According to the Court in this case, “The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer.”

Lessons Learned; Best Practices

Boeck offers some recommendations for both owners and general contractors, stating that this case highlights some important concepts:

  1. The importance of good project contract documents
  2. The importance of good “hands on” project risk management
  3. The importance of understanding what insurance covers
  4. The importance of bonds
  5. Considering coverage in claims

Back to the “Quality Assurance” issue…

I just want to point out that in this project, “the owner also retained Quality Assurance, presumably, to do just that.” I have been involved with a number of cases recently where third-party “quality assurance” had been retained, yet failed to live up to their stated goal of actually assuring quality.

As Boeck says:

[W]hy didn’t anyone catch the hook error until the fourth floor had been built? Paper management is one thing, active and effective quality control is another. Even if the “catch” wasn’t in the shop drawing phase, there were plenty of potential “eyes” that could have caught the error on the first floor and saved substantial time and money. I’m sure everyone is grateful the “catch” wasn’t delayed until the 13th floor, but were there qualified personnel randomly verifying basic work?

Not all QA/QC companies/approaches are created equal. In the ensuing weeks and months, expect much more digital ink on this important topic.

Please take the time to read all of Boeck’s article, as I think it is an outstanding analysis on a crucial issue impacting California’s built environment.

Source: Ahead of Schedule


Construction_work_on_the_Millennium_Tower_(301_Mission_Street),_SF

Image courtesy Wikimedia

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