arnstein & lehr construction law newsletter winter 2010

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ARNSTEIN & LEHR CONSTRUCTION NEWSLETTER | WINTER 2010 1 Smart Grid revolution gets energized SMARTGRID Continued on Page 2 By Cynde Hirschtick Munzer, Partner The “smart grid” revolution to replace the nation’s aging electrical distribution network has been energized with the federal govern- ment’s recent announcement of $3.4 billion in federal grants for 100 projects to help build a smarter electrical grid. The 100 recipients of the Smart Grid Investment Grant (SGIG) Awards in- clude private companies, utilities, manufacturers, cities and others working with them. A “smart grid” describes a modernized electric transmission and distribution system – enabled by digital technology – that deliv- ers detailed, real-time information about energy use to consum- ers. Currently, most consumers get a monthly electric bill in the mail that shows how much electricity has been used in the prior month. The federal government is funding several grid moderniza- tion projects across the country that will significantly reduce the amount of power that is wasted from the time it is produced at a power plant to the time it gets to consumers. By deploying digital monitoring devices and increasing grid auto- mation, the SGIG Awards will increase the efficiency, reliability and security of the system, and will help link up renewable energy sources with the electric grid. To help tap into those renewable energy sources, the smart grid allows for the feeding of the off- the-grid power efficiency into the electrical distribution grid. That means knowing when it is sunny to tap solar power or windy to tap wind power, and communicating those options to a utility’s control center. The American Recovery and Reinvestment Act of 2009 included a total of $4.5 billion in funding available for smart grid technology. The SGIG Awards range in size from $400,000 to $200 million and Looking back on 2009 By Justin L. Weisberg, Partner 2009 was a challenging year for Construction which was signifi- cantly impacted by the recession. The Construction Group at Arnstein & Lehr responded to a number of challenging issues which reflected the difficulties encountered by our clients as a consequence of the extremely challenging economic climate. The construction industry suffered from the publicized financial decline, which included a significant decline in construction and real estate transactions and a general tightening of credit to many businesses involved in the construction industry. In ad- dition, while mechanics liens had historically provided security to insure the payment of contractors and subcontractors, the impact of the economic downturn in 2009 resulted in the failure of a number of projects prior to completion, leaving in a number of instances, assets secured by mechanics liens that did not have sufficient value to secure payment. We had a promising finish in the fall of 2008, obtaining a number of solutions for our clients, a few of which included: 1) the recovery of payment for a subcontractor subsequent to an appellate opinion affirming a judgment which ultimately exceeded one million dollars in a large, complex, multiparty, mechanics lien and mortgage foreclosure action on a condo- minium building construction project; 2) obtaining a seven figure settlement payment after the successful conclusion of the contract and bond defense and appeal, and the prosecution and settlement of a public lien claim in a complex multiparty action involving multiple public school projects; 3) obtaining payment based upon a mechanics lien on a failed ethanol plant project as a result of the bankruptcy by the Owner; 4) obtaining several judgments in excess of million dollars against individuals and companies that misappropriated the identity, contracts and funds of a national electrical contractor client; and 5) obtaining a significant trial court opinion dismissing a lien claim against an Owner under the Home Remodeling and Repair Act of Illinois. 2009 Continued on Page 4

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The Winter issue of Arnstein & Lehr's Construction Law newsletter, is now available and highlights many items of interest. The issue includes an article written by Chicago Partner Cynde Hirschtick Munzer about the Smart Grid revolution, and the push to replace the nation's electrical distribution network. This issue also includes a review of 2009, information for contractors on the American Recovery and Reinvestment Act of 2009, and court decisions on faulty workmanship claims. In addition, there is information on upcoming speaking engagements and upcoming and recent publications by Arnstein & Lehr attorneys.

TRANSCRIPT

Page 1: Arnstein & Lehr Construction Law Newsletter Winter 2010

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Smart Grid revolution gets energized

SMARTGRID Continued on Page 2

By Cynde Hirschtick Munzer, Partner

The “smart grid” revolution to replace the nation’s aging electrical distribution network has been energized with the federal govern-ment’s recent announcement of $3.4 billion in federal grants for 100 projects to help build a smarter electrical grid. The 100 recipients of the Smart Grid Investment Grant (SGIG) Awards in-clude private companies, utilities, manufacturers, cities and others working with them.

A “smart grid” describes a modernized electric transmission and distribution system – enabled by digital technology – that deliv-ers detailed, real-time information about energy use to consum-ers. Currently, most consumers get a monthly electric bill in the mail that shows how much electricity has been used in the prior month. The federal government is funding several grid moderniza-tion projects across the country that will significantly reduce the amount of power that is wasted from the time it is produced at a power plant to the time it gets to consumers.

By deploying digital monitoring devices and increasing grid auto-mation, the SGIG Awards will increase the efficiency, reliability and security of the system, and will help link up renewable energy sources with the electric grid. To help tap into those renewable energy sources, the smart grid allows for the feeding of the off-the-grid power efficiency into the electrical distribution grid. That means knowing when it is sunny to tap solar power or windy to tap wind power, and communicating those options to a utility’s control center.

The American Recovery and Reinvestment Act of 2009 included a total of $4.5 billion in funding available for smart grid technology.

The SGIG Awards range in size from $400,000 to $200 million and

Looking back on 2009By Justin L. Weisberg, Partner

2009 was a challenging year for Construction which was signifi-cantly impacted by the recession. The Construction Group at Arnstein & Lehr responded to a number of challenging issues which reflected the difficulties encountered by our clients as a consequence of the extremely challenging economic climate. The construction industry suffered from the publicized financial decline, which included a significant decline in construction and real estate transactions and a general tightening of credit to many businesses involved in the construction industry. In ad-dition, while mechanics liens had historically provided security to insure the payment of contractors and subcontractors, the impact of the economic downturn in 2009 resulted in the failure of a number of projects prior to completion, leaving in a number of instances, assets secured by mechanics liens that did not have sufficient value to secure payment.

We had a promising finish in the fall of 2008, obtaining a number of solutions for our clients, a few of which included: 1) the recovery of payment for a subcontractor subsequent to an appellate opinion affirming a judgment which ultimately exceeded one million dollars in a large, complex, multiparty, mechanics lien and mortgage foreclosure action on a condo-minium building construction project; 2) obtaining a seven figure settlement payment after the successful conclusion of the contract and bond defense and appeal, and the prosecution and settlement of a public lien claim in a complex multiparty action involving multiple public school projects; 3) obtaining payment based upon a mechanics lien on a failed ethanol plant project as a result of the bankruptcy by the Owner; 4) obtaining several judgments in excess of million dollars against individuals and companies that misappropriated the identity, contracts and funds of a national electrical contractor client; and 5) obtaining a significant trial court opinion dismissing a lien claim against an Owner under the Home Remodeling and Repair Act of Illinois.

2009 Continued on Page 4

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excellent opportunity to test consumer site programs and benefits from smart meters.

Illinois is a national leader in offering residential customers real-time pricing options, and is among the leading states in mandat-ing increased renewable sources and energy efficiency, accord-ing to the Illinois Smart Grid Initiative (ISGI). “Illinois is well positioned to become the national leader in the adoption of a fully consumer-focused smart grid,” commented the ISGI. The ISGI notes that Illinois was recently named as one of the “smartest” states in progressing toward a modern electricity system, citing the state’s collaborative approach of “engaging communities up and down and all across the state.” The ISGI was formed last year to engage Illinoisans in examining the nature and potential benefits of a modernized electric grid, into map a policy path for

achieving those benefits for consumers and the economy. The group includes lo-cal governments, consumer groups, busi-ness associations and energy advocates, among others.

The SGIG Awards were announced by the President at the Florida Power & Light Company facilities, and Florida businesses were the beneficiary of a substantial amount of the SGIG Award funds. Florida Power & Light Company received an award to advance implementation of the smart grid, including installation of over $2.6 million smart meters, 9,000 intel-ligent distribution devices, 45 phasers and advancing monitoring equipment in over 270 sub-stations. By incorporating intel-

ligence into the transmission, distribution and customer systems, the utility would be able to anticipate and respond to grid distur-bances, and power customers through alternative rate programs, enable to integration of renewable and on-site energy sources.

Also in Florida, Talquin Electric Cooperative in Quincy received an $8.1 million grant to install a smart-meter network for 56,000 residential and commercial customers in a mainly rural, four-county service area in North Florida and to integrate an outage management system as part of the smart grid.

The City of Leesburg, Florida received a $9.7 million SGIG Award grant to enable new energy efficiency and conservation programs to all 23,000 electric consumers through deployment of smart-meter networks, energy management for municipal buildings, integrated distributed generation and a new sub-station power transformer with enhanced monitoring and control.

Progress Energy of Florida in St. Petersburg received $100 mil-lion for smart grid development.

cover an impressive array of smart grid technologies. The funds will help fund the deployment of about 18 million smart meters. They will also pay for roughly one million home energy manage-ment displays, which will help consumers exercise more control over their energy use. They additionally will support expansion of the smart appliance market (such as dishwashers and wash-ers and dryers) to give consumers even more control over their energy consumption.

Utilities also received funds to improve their antiquated distribu-tion networks. For instance, SGIG Awards were given for 700 automated substations that will allow utilities to respond more quickly to weather-related outages. Grants were also given for the installation of about 200,000 advanced transformers that will enable utilities to monitor and switch out units before they fail.

“This is the first step toward a more advanced electricity system that will pro-vide customers with more information, more quickly,” said Anne Pramaggiore, ComEd president and chief operating officer, in a press release about the smart grid implementation. “By providing daily usage information, ComEd is mov-ing from an electricity delivery business model to a 21st century delivery and service model.”

SGIG Awards were also given for the installation of 850 additional synchro-phasors, providing the United States – at long last – with 100% coverage of the national high-voltage transmission system. With this funding, this country should soon have a much needed “air traffic control system” for the smart grid, helping the U.S. to start to catch up with China’s state-of-the-art wide area monitoring system (WAMS). This type of monitoring ability also will help the smart grid take on large amounts of renewable energy such as wind and solar power when they are available, and to make needed adjustments when those sources are not producing.

As part of the SGIG Awards, the City of Naperville, Illinois was awarded nearly $11 million to deploy more than 57,000 smart meters and install the infrastructure and software necessary to support and integrate various smart grid functions and the two-way flow of information between the utilities and customers.

Pramaggiore emphasized the importance of smart grid initiatives when she was honored by Arnstein & Lehr LLP at its Woman of Vision award luncheon this summer. ComEd’s smart meter pilot, proposed for 2010, will test how the system can offer real benefits to Illinois consumers. With 100,000 to 200,000 meters to be included in the pilot, industry observers say that Illinois has an

SMARTGRID Continued from Page 1

“this is the first step toward a more advanced

electricity system that will provide customers

with more information, more quickly.”

Anne Pramaggiore ComEd president and chief operating officer

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By W. Matthew Bryant, Associate

The Illinois Home Repair and Remodeling Act (the “HRRA”, codified at 815 ILCS 513/1) applies to contractors (but not subcontractors, see MD Electrical Contractors, Inc. v. Abrams, 228 Ill.2d 281 (2008)) performing repair or remodeling work on a residence. Among other requirements, the HRRA requires a contractor to furnish a written contract or work order. The HRRA also requires a contractor to provide a consumer rights pamphlet before signing a contract. A violation of the HRRA is a violation of the Consumer Fraud and Deceptive Business Practices Act.

The different districts of the Illinois Appellate Court have rendered conflicting decisions on the effect of a contractor’s failure to follow the requirements of the HRRA. Some cases determined that the contractor was barred from any recovery, because to allow a recovery would contravene the legislature’s intent to protect homeowners. Other cases have allowed the contractor to recover because the work was substantially performed and to hold otherwise would allow the homeowner to receive a windfall. Yet another case has barred the contractor from recovery under mechanics lien and breach of contract theories, but allowed the contractor to recover the value of the work performed.

A recent trend in the law has been to allow some recovery to an honest contractor. A recent special concurrence compares the cases barring recovery for failure to comply with the HRRA to an out-of-control police dog:

Thirty-five years ago, the Peoria police department had a police dog named Prince. Prince had teeth. Real sharp ones. Powerful jaws, too. The dog was to use those teeth to bite and subdue criminals who were fleeing or fighting police. The problem was, Prince bit virtually anybody and everybody, except his handler. Prince bit as many officers and citizens as he did combative criminals.… There were gaping holes, missing tissue, and broken bones where human flesh used to be. After paying out a small fortune in personal injury settlements, the city decided it was time to retire Prince and pay for well-trained police dogs that use their teeth only as intended.

I submit the Bogard [strict] construction of the Act, in addition to being unsupported by the statutory language, has created another Prince. There is no need to unleash a dog that bites indiscriminately. If there is fraud or failure to perform, the contractor’s recovery under the Mechanics Lien Act will either be denied or reduced depending on the facts of the particular case.

The HRRA is not intended as a “giant legal ‘Gotcha!’ permitting a homeowner to improve his or her house at the expense of an honest contractor.” Fandel v. Allen, 3-08-0237 slip op. at 21 (Ill.App.3 Dist. Jan. 14, 2010) (Schmidt, J., specially concurring). The Illinois Supreme Court is expected to decide on this issue and provide a definitive rule. In the meantime, contractors should provide written contracts and the required consumer rights brochure to homeowners for any work performed on a home.

A primer for contractors on the American Recovery and Reinvestment Act of 2009

By Louis J. Gale, Associate

The construc-tion industry has suffered greatly as a result of the re-cession that be-gan in Decem-ber 2007. The unemployment rate within the construction industry spiked as the country fell into the recession. In response to the dire economic situation the United States Congress passed, and President Obama signed, the America Recovery and Reinvest-ment Act (“ARRA”). The ARRA contains billions of dollars in infrastructure projects that will aid the construction industry. With well over $160 billion of the ARRA funds timed to be al-located in 2010 and 2011, now is the time for contractors to act in order to participate in the ARRA’s projects.

However, contractors seeking to construct these projects must be aware of the requirements that the ARRA places on them. For instance, contractors must put in place whistleblower pro-tections and comply with reporting requirements including their progress on a given project.

Additionally, existing federal laws, such as the Buy American Act requires the use of American made materials, supplies and good on public projects. Furthermore, Illinois laws, such as the recently enacted limitation on political contributions for con-tractors working with the State, must still be followed, creating a compliance issue for any contractor seeking to participate in the funds available via the ARRA.

For more information on this topic see “A Primer for Contrac-tors on the Pitfalls and Promise of the American Recovery and Reinvestment Act of 2009” by the author, which is scheduled for publication in an upcoming issue of the Illinois Bar Journal.

Residential contractors beware

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By W. Matthew Bryant, Associate

The First District Illinois Appellate Court held that a party owed an undisputed amount in a claim under the Illinois Mechanics Lien Act (the “Act”) was entitled to attorneys fees pursuant to Section 17 of the Act. At trial, the parties acknowledged that there was at minimum $47,562.19 due from the defendant to the plaintiff. The trial court entered judgment in favor of plaintiff and against defendant, but declined to award the plaintiff attorneys fees, finding that there was a good-faith basis for refusal to pay. The Appellate Court reversed and remanded for the trial court to conduct a fee hearing, as the uncontroverted testimony was that the amount was “undisputed.” In light of this decision, it is important for those receiving a demand for payment by a lienholder to tender any undisputed amounts to avoid imposition of attorneys fees in later litigation.

Failure to pay undisputed amounts in Illinois mechanics lien cases requires award of attorney fees

However, the winter of 2009 quickly indicated the impact of the changed financial landscape. A number of developers and contractors suffered extensive losses as a result of the declining economy which significantly impacted the viability of a number of businesses. Despite significant economic pressures upon all participants in the construction industry, through determination, the use of our construction and engineering knowledge, and as a result of our close integration with our trial, business, bankruptcy, municipal, insurance and employment groups, we continued to move forward in 2009.

Some of the solutions we obtained on behalf of our clients included: 1) The resolution of a claim for final payment for a booster pump station constructed by our client for a water utility company and successfully challenging the utility’s liquadated damages claims based upon a dispute concerning certain technical requirements of the drawings and specifications for the Project; 2) resolving claims relating to the demolition of a chemical plant on behalf of an Owner; 3) obtaining a favorable federal jury verdict against a property Owner seeking nearly $2 million in damages on behalf of a developer that did not close on a contract to purchase a property in Chicago originally planned for demolition and devel-opment; 4) obtaining quick resolution of mechanics lien claims on behalf of a trade contractor despite numerous competing claims on the unfinished project by focusing upon the liability of the contractor and negotiating a settlement which included immediate payment and assignment of lien rights; 5) obtaining a judgment against a developer that refused to repair significant defects in a condominium building; and 6) successfully defeating an emer-gency motion to stop construction of repairs, and reinstituting an action against a contractor on behalf of an Owner for construction defects requiring millions of dollars in repairs after the action had been dismissed with prejudice under the representation of a prior law firm.

Our efforts in 2009 which included the negotiation of public and private construction contracts and counseling clients on regula-tory issues provide us with optimism in looking forward to 2010. It is clear that any sustained economic recovery will require the construction of significant improvements to facilitate the imple-mentation of advances in information technology, the protection of the environment, the retooling of our industrial base and the replacement of our aging infrastructure. Any advances to the economy must be led by construction in infrastructure, health-care, environmental cleanup and maintenance, communications, transportation, energy, education, government, manufacturing, water, wastewater, natural resources and business. In addition, as advances in technology change the way individuals live and work, a significant segment of the population will demand residential improvements relating to the environment, energy, and commu-nications. We look forward to the continued representation of our construction industry clients as they meet the challenges of 2010 and appreciate our clients’ selection of Arnstein & Lehr as a member of their teams.

OFCCP increasing compliance audits on federal construction contractorsBy Mark A. Spognardi, Partner

The Office of Federal Contract Compliance Programs (OFCCP) has issued its Technical Assistance Guide for Federal Construc-tion Contractors. The OFCCP is responsible for ensuring that contractors doing business with the federal government do not discriminate and take affirmative action.

The OFCCP also announced that it will begin conducting com-pliance reviews of construction contractors who receive fund-ing and grants from the American Recovery and Reinvestment Act of 2009 (ARRA). According to the OFCCP, the majority of ARRA funding and grants will provide direct funding or federal assistance to construction projects and therefore, the OFCCP will place a special emphasis on the construction industry. Mea-sured from July 2009, OFCCP will to review a minimum of 360 construction contractors and 90 supply and service contractors, including at least 10% of first-time federal contractors. These reviews will be followed by quarterly compliance evaluations through September 30, 2010.

To help contractors achieve compliance, OFCCP plans to host a series of compliance seminars and webinars specifically for fed-eral construction contractors and new federal contractors. The schedule of events can be found at www.dol.gov/dol/calendar/.

2009 Continued from Page 1

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By Justin L. Weisberg, Partnerand Louis J. Gale, Associate

Most if not all Construction Contracts require a party perform-ing under a contract such as a contractor or sub-contractor to in-demnify the party that they have contracted with as well as certain other parties such as architects and engineers. The indemnity is usually provided for claims which result in bodily injury or dam-age to property. Many standard indemnity agreements reflect the public policy of a number of states and limit the indemnity provided by the indemnitor to the negligence of the indemnitor. Accordingly, such indemnity provisions do not indemnify the indemnitee for the indemnitee’s own negligence. Historically, the parties providing standard indemnity agreements relied upon the understanding that any claims under the standard indemnity agreements would be covered under the “insured contract” provisions of a typical commercial general liability (“CGL”) policy. In 2007, the Illinois Supreme Court in Virginia Surety Co. v. Northern Ins. Co., 224 Ill.2d. 550 (2007), deter-mined that a standard type of indemnity provision which did not provide indemnification to the indemnitee for its own negligence was not an “insured contract” and therefore not covered under a typical CGL policy.

In Virginia Surety, the Supreme Court was analyzing whether in-demnification which included what is known as a Kotecki waiver was covered under the Contractor’s CGL policy. A Kotecki limit applies in the situation where a worker’s employer and a third party are both responsible for a worker’s injury. The employer’s liability not only to the employee but also in contribution to any third party is capped at a limit calculated in accordance with to the Workers Compensation Act even though the liability of the other negligent third parties is not capped. Under Illinois, an employer such as a subcontractor is free to waive the protection provided by the workers compensation limits and agree to pay the difference between its workers compensation liability and the total liability it would have in absence of the Workers Compen-sation Act to a third party. This waiver is known as a Kotecki waiver and is found in most form construction contracts. Vir-ginia Surety determined that the Kotecki waiver provide by the Contractor in that case was a voluntary waiver of an affirmative defense and was not covered under a standard CGL policy.

As a consequence of Virginia Surety, it is unlikely that a con-tractor or subcontractor will find coverage for the defense and indemnification obligations that they have agreed to provide under standard indemnity agreements in Illinois and other states that might follow the rationale of the Illinois Supreme Court in the future. Consequently, Illinois contractors and subcontractors have been saddled with uncovered indemnity obligations follow-ing the Virginia Surety holding in 2007, although many Owners still require Contractors to provide the very types of indemnity agreements which are not covered under the CGL policies.

One partial solution to the uncovered risk from an indemnity agreement can be found in employer liability policies, although the limits of these policies are significantly less than the value for a significant bodily injury or property damage claim. A more complete solution might be found through the use of the addi-tional insurance. A contractor in many cases is required not only to indemnify an Owner, but also to name the Owner and other designated parties as additional insureds under the contractor’s general liability policy. Additional insurance provisions are not subject to the Anti Indemnity Act and therefore an additional insurance provision can provide insurance for the additional insured’s own negligence. In addition, an additional insured is permitted to look directly to the insurer that will provide cover-age, resulting in a direct obligation by the insurer to the addi-tional insured. Illinois recognizes a targeted tender rule, which permits an insured to avoid using its own carrier. The additional insured may choose to seek coverage under the policy in which it is named as an additional insured, even though it may have purchased its own insurance policy.

However, the targeted tender rule in Illinois is not without its limits. A limit placed on an additional insured can be found within the policy that covers the additional insured. If a claim arises out of a named additional insured’s acts and the additional insured seeks coverage, the additional insured will not be cov-ered if the insurance policy in which it is the additional insured contains a “sole negligence” exclusion and the injured party only alleges that the additional insured’s negligence is what caused their injury. In sum, additional insurance can provide coverage for uncovered risk under an indemnity provision, although the contractor or subcontractor should be aware that the terms of the insurance policy and the additional insurance endorsement can have a significant impact upon the coverage that is provided.

For more information on this issue, see “A Closer Look at The Rights of An Indemnified Party as Compared To The Rights of an Additional Insured From an Insurance Coverage Perspective” written by the authors of this article in the January/February issue of Coverage published by the Insurance Litigation Committee of the Litigation Section of the American Bar Association.

Rights of an indemnified party compared to rights of an additional insured -- an insurance coverage perspective

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By Justin L. Wesiberg, Partner

Prior to December of 2007, the law was not settled in Florida concerning whether a claim by an Owner against a Contrac-tor for damages due to faulty Construction would be covered under a standard form CGL policy. On December 20, 2007, the Supreme Court of Florida came down with the decision in U. S. v. J.S.U.B., determining that a post - 1986 standard form com-mercial general liability (CGL) policy with products-completed operations hazard coverage, issued to a general contractor, pro-vided coverage when a claim was made against the Contractor for damage to the completed project caused by a subcontractor’s defective work. U. S. v. J.S.U.B, 979 So.2d 871 (Fla. 2007). In that case Homeowners made claims asserting damage due to foundations, dry-wall, and other interior portions of the homes. It was undisputed that the damage to the homes was caused by J.S.U.B.’s subcontractors’ use of poor soil and improper soil compaction and testing. J.S.U.B. submitted the claims to United States Fire Insurance Company (“U. S.”) for defense and indemnification. U.S. denied coverage for the claims stating that J.S.U.B.’s faulty workmanship did not constitute an oc-currence which would be covered by the CGL policy. J.S.U.B. repaired the damaged homes and filed a declaratory judgment action seeking a determination that the homeowner claims were covered under the U.S. policy. The Florida Supreme Court agreed determining that faulty workmanship did fall under the meaning of occurrence. In support of its determination, the Supreme Court noted that in the event of an ambiguity in the policy, the ambiguity would be interpreted in favor of coverage. It also noted that a finding that the policy did not cover faulty workmanship in the first place would have made the products completed operations hazard exception to the “your work” ex-clusion meaningless. U. S. v. J.S.U.B., 979 So.2d at 887. In June of 2008 the Florida Supreme Court further defined avail-able coverage for property damage claims in Auto Owners v. Pozzi Window stating the requirement that the subcontractor’s defective work must have caused damage to “tangible property” or some other part of the Project. In Pozzi a Homeowner bought windows from a window manufacturer and the window manu-facturer subcontracted the installation of the windows. There was a dispute regarding whether the the windows were defective as delivered or whether the installation of the windows caused defects in the windows. The Florida Supreme Court stated if the windows were purchased by the Homeowner and were not defective before being installed, coverage would exist for the cost of repair and replacement of the windows because there is a physical injury to tangible property (the windows) caused by defective installation by a subcontractor. However, the Court noted that a different result would occur if the windows were defective both prior to installation and as installed, which it determined would be merely a claim to replace a “defective component” and would not be covered as the mere replacement

Recent Florida decisions provide insurancecoverage for faulty workmanship claims

of a defective component does not constitute “prop-erty damage.” Following the guidance of Pozzi, the United States District Court for the Middle District of Florida reviewed whether pleadings which alleged that the con-tractor “[failed] to properly construct and install the exterior tile and porches” and damages which included, “the costs associated with investigating and repairing or replacing [Contrac-tor’s] defective and nonconforming work” would be considered “property damage under a CGL policy. The Court denied the the motion to dismiss by the Insurer stating: “It appears from the surface that defective decks, characterized in the [Homeowner’s] counterclaim as “porches” constitute defective work, which would fall under the definition of “property damage” under the policy and Florida law. However, before making an outcome-de-terminative finding, the Court requires further briefing and a more developed record.” Homes By Deramo, Inc. v. Mid Continent Casualty Co. (M.D. Fla. 9-14-2009). In an interesting twist, the United States District Court for the Middle District of Florida recently applied the rational of J.S.U.B. and Pozzi to a Marine General Liability (“MGL”) policy in St. Paul v. Sea Quest. In Sea Quest, the Court decided that the same rationale in Pozzi was equally applicable to a MGL policy and that the mere inclusion of defective component, or the defective installation does not constitute property damage unless the defective component results in physical injury to some other tangible property. Therefore, damages which included the cost of removing and replacing faulty work and completing the unfin-ished yacht did not cause damage beyond the faulty workman-ship and therefore there was no property damage. St. Paul v. Sea Quest (M.D. Florida 12-17-2009). While the Court decided Sea Quest based upon the determination that there was no occurrence, it did note that even if there was “property damage” the claim would have likely been excluded as “coverage to property while on the premises owned by or rented to the insured for the purpose of having operations performed on such property by or on behalf of the insured” because all of the alleged damages occurred while the yacht was being constructed at the yacht builders shipyard. In conclusion, the recent Florida opinions expressed above would indicate that under a standard CGL policy with completed opera-tions coverage, a construction defect claim by an Owner against a Contractor which alleges that defective construction by a subcon-tractor caused damage to some other part of the project, would likely be covered.

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Upcoming Speaking Engagements

Upcoming Publications

March 5, 2010- Justin L. Weisberg- “When Insurance Law Meets Commercial Law,” ABA Insurance Coverage Litigation Committee, Tuscon, AZ

March 24, 2010- Samuel H. Levine, Justin L. Weisberg, W. Matthew Bryant, Arthur L. Janura, Roy L. Bernstein, “Illinois Civil Engineering and Surveying land Law”HalfMoon LLC- IIT Campus, Wheaton, IL

April 27, 2010- Justin L. Weisberg- ISBA AIA Contract Seminar, Chicago, IL

May 21-22, 2010- Justin L. Weisberg- “Negotiating A Winner - Deal Making and A/E/C Contracts,” ACEC, San Francisco, CA

Samuel H. Levine- co-authored “Trial Practice: Proof Of Selected Issues. and “Trial Practice: Breach and Damages,” Illinois Institute of Continuing Legal Education Mechanics Lien In Illinois Handbook. The book is scheduled for publication the end of January 2010.

Samuel H. Levine- “Mechanics Lien In Bankruptcy” chapter for Illinois Institute of continuing Legal Education Handbook

Justin L. Weisberg and W. Matthew Bryant - West Illinois Practice Series Construction Law Manual Chapters 3 and 7; Justin L. Weisberg- Illinois Institute of Continuing Legal Education Volume 2 Transactional Construction Law - Chapter 3 “Negotiating Construction Contracts” Justin L. Wesiberg and Louis J. Gale- “A Closer Look at The Rights of An Indemnified Party as Compared To The Rights of an Additional Insured From an Insurance Coverage Perspective” - ABA Insurance Coverage - February issue

Arnstein & Lehr’s Construction Practice Group employs innovative and creative methods to represent private, public, local and interna-tional clients in a variety of construction-related transactions and liti-gation matters. Our Construction Practice Group includes attorneys with construction industry experience who understand the design and construction process. They have previous career experience in professional engineering which included design, evaluation and construction-related engineering services on significant projects. Arnstein & Lehr construction attorneys also have an understanding of issues unique to the design and construction industry, attained through their longstanding experience in the representation of con-struction industry clients.

Chicago Construction Group AttorneysJustin L. Weisberg - Chair W. Matthew Bryant Barry A. Chatz Mark E. Enright Louis J. Gale Samuel H. Levine Hal R. Morris Cynde Hirschtick Munzer Daniel I. Schlade Mark A. Spognardi

Walter J. Starck Paul E. Starkman

Coral Gables Construction Group AttorneyDavid Shear

Fort Lauderdale Construction Group AttorneyAlan G. Kipnis

Tampa Construction Group AttorneyRonald J. Marlowe

AppointmentsJustin L. Weisberg- ASCE Delegate Engineers Joint Contract Document Committee; Co-Chair of the Additional Insured Subcommittee of the Insurance Coverage Litigation Commit-tee of the Litigation Section of The American Bar Association, and Public Construction Bond Act Amendment Subcommittee, Chicago Bar Association Mechanics Lien Committee

Samuel H. Levine- Chair of the Illinois State Bar Association Special Committee on Construction

Page 8: Arnstein & Lehr Construction Law Newsletter Winter 2010

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miami200 South Biscayne BoulevardSuite 3600Miami, Florida 33131P 305.374.3330 | F 305.374.4744

tampaTwo Harbour Place302 Knights Run Avenue, Suite 1100Tampa, Florida 33602P 813.574.5000 | F 813.254.5324

west Palm Beach515 North Flagler DriveSuite 600West Palm Beach, Florida 33401P 561.833.9800 | F 561.655.5551

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