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Court of Appeals changes from minority to majority approach in construction contract dispute

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A fire during a renovation project that devastated a southern Indiana courthouse ignited a dispute between the county and the contractor that persuaded the Indiana Court of Appeals to reverse course and adopt a new approach to interpreting construction contracts.

The Court of Appeals has historically taken the so-called “minority approach” to determine what the waiver of subrogation covers, even applying that approach as recently as October 2013. However, in reviewing an appeal by Jefferson County commissioners in February, two of the three judges on the panel found the “majority approach” rendered a “more logical and compelling resolution.”

Attorneys say the long-term impact of the decision in The Board of Commissioners of the County of Jefferson v. Teton Corp, et al., 72A04-1302-CT-55, will probably come to light on a case-by-case basis, but at present the dispute underscores the importance of making sure property owners have all the required insurance when starting a construction project.

courthouse-15col.jpg A fire during a reconstruction project on the county courthouse in historic Madison required nearly 200 firefighters and millions of gallons of water to extinguish. (Photo courtesy of The Madison Courier)

The Court of Appeals, according to William Kelley Jr., attorney at Drewry Simmons Vornehm LLP, seems to be suggesting that the county missed an opportunity by not purchasing all the insurance required in the contract.

However, what Kelley and Sam Laurin, partner at Bose McKinney & Evans LLP, question is whether the extra insurance would have covered the damages for which Jefferson County was seeking payment.

Switching approaches

Prior to starting a refurbishing project on its historic courthouse in Madison, the Jefferson County commissioners entered into an American Institute of Architects contract with the general contractor, Teton Corp. The contract required the county to purchase builder’s risk insurance or, if it did not, to tell Teton of its decision to forgo the extra insurance.

Jefferson County did not get the builder’s risk coverage and did not inform the contractor. The appellate court concluded the county breached the contract when it failed to let Teton know it did not buy separate coverage.

The Jefferson County courthouse caught fire during renovations in May 2009, causing more than $6 million in damages.

The Court of Appeals rejected Jefferson County’s argument that embodied the approach taken by a minority of courts in other states, including Indiana, of dividing the project into work directly related to the construction project and non-work that is not part of the project. In its argument, the county asserted the damage to the courthouse included non-work property and that under the terms of the AIA contract, Teton was responsible for getting insurance to cover claims that fit the “other than to the work” clause.

Looking at the language of the AIA contract, the appeals court determined the county’s minority view of the waiver of subrogation ignored that language and its intent. Consequently, the Court of Appeals said the approach taken by a majority of state courts that disregards work versus non-work property and instead considers both the language of the AIA contract and the public policy behind it was the “better interpretation of the ambiguity in the contract and the better approach to risk allocation in construction projects in general.”

Laurin, chair of the construction law group at Bose, said the opinion is unclear as to what damages the county was trying to recover and, more importantly, whether those damages would have been covered by the builder’s risk insurance.

kelley Kelley

If the builder’s risk policy should have made payment, then he agreed with the majority that the county did breach the contract. However, if the builder’s risk policy was not intended to cover the damage, then, he said, the dissent by Judge Elaine Brown is correct based on the cited contract language.

The issues raised in this case, Laurin continued, highlight the particular issues that come up when new construction is being performed in an existing building or an addition is built.

A change in wording

The AIA contract has ambiguities but, Kelley said, because that contract has been so widely used, many courts have interpreted the language and now few provisions still need treatment by the courts.

Yet ambiguities exist and that gives rise to differing interpretations. During oral arguments, COA Judge Edward Najam pointed out that counsel for both sides were each advocating for the same thing: that a plain reading of the contract will provide the answer to this case.

In her dissent, Brown noted a change in the contract language that, to her, made a significant difference.

The standard AIA contract provides that the owner insures properties “at or adjacent” to the site with policies separate from those policies covering the project. In Jefferson County’s case, the word “at” was replaced with “adjoining.”

Accordingly, Brown argued based on the contract’s language, the waiver of subrogation only applied to sites next to the courthouse and not the courthouse itself.

In further reading the contract, Brown sided with Jefferson County, finding the minority approach “applies with equal force.” The county had a policy that covered work-related damages and by substituting “adjoining” for “at,” the parties agreed the contractor would assume the risk for any non-work damages to the courthouse.

The Court of Appeals set the precedent for Indiana using the minority approach in Midwestern Indem Co. v. Sys. Builders, Inc., 801 N.E.2d 661 (Ind. Ct. App. 2004). And it upheld that precedent in Allen County Public Library v. Shambaugh & Son, L.P., et al., 997 N.E.2d 48 (Ind. Ct. App. 2013).

In the Allen County case, a diesel-fuel leak caused by a pipe ruptured during the installation of a concrete floor in the library’s basement created an environmental mess. After cleaning up the fuel, the library filed a claim under its builder’s risk policy. When the insurance company only paid the $5,000 policy limit, the library sued the general contractor and subcontractors to recover the nearly $500,000 it had paid to remove the fuel.

The Court of Appeals ruled the waiver of subrogation did not apply because the contract did not require the library to obtain insurance for damage to property surrounding the jobsite. The fuel spill was not part of “the work” as defined by the contract.

Looking at the Allen County Library decision, the Court of Appeals contended the library would still be successful under the majority approach. But the amount of the library’s recovery would have been limited to the $5,000 set in the environmental provision of the insurance policy.

As the Court of Appeals noted in its finding against Jefferson County, the Indiana Supreme Court has not addressed the waiver of subrogation issue. The litigation arising from a fuel leak in a library and a courthouse fire might provide the Supreme Court with the reason to weigh in.

In the meantime, Kelley emphasized the lesson from Jefferson County is that both the property owner and contractor should have some idea what the waiver language encompasses.•

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  1. Yes diversity is so very important. With justice Rucker off ... the court is too white. Still too male. No Hispanic justice. No LGBT justice. And there are other checkboxes missing as well. This will not do. I say hold the seat until a physically handicapped Black Lesbian of Hispanic heritage and eastern religious creed with bipolar issues can be located. Perhaps an international search, with a preference for third world candidates, is indicated. A non English speaker would surely increase our diversity quotient!!!

  2. First, I want to thank Justice Rucker for his many years of public service, not just at the appellate court level for over 25 years, but also when he served the people of Lake County as a Deputy Prosecutor, City Attorney for Gary, IN, and in private practice in a smaller, highly diverse community with a history of serious economic challenges, ethnic tensions, and recently publicized but apparently long-standing environmental health risks to some of its poorest residents. Congratulations for having the dedication & courage to practice law in areas many in our state might have considered too dangerous or too poor at different points in time. It was also courageous to step into a prominent and highly visible position of public service & respect in the early 1990's, remaining in a position that left you open to state-wide public scrutiny (without any glitches) for over 25 years. Yes, Hoosiers of all backgrounds can take pride in your many years of public service. But people of color who watched your ascent to the highest levels of state government no doubt felt even more as you transcended some real & perhaps some perceived social, economic, academic and professional barriers. You were living proof that, with hard work, dedication & a spirit of public service, a person who shared their same skin tone or came from the same county they grew up in could achieve great success. At the same time, perhaps unknowingly, you helped fellow members of the judiciary, court staff, litigants and the public better understand that differences that are only skin-deep neither define nor limit a person's character, abilities or prospects in life. You also helped others appreciate that people of different races & backgrounds can live and work together peacefully & productively for the greater good of all. Those are truths that didn't have to be written down in court opinions. Anyone paying attention could see that truth lived out every day you devoted to public service. I believe you have been a "trailblazer" in Indiana's legal community and its judiciary. I also embrace your belief that society's needs can be better served when people in positions of governmental power reflect the many complexions of the population that they serve. Whether through greater understanding across the existing racial spectrum or through the removal of some real and some perceived color-based, hope-crushing barriers to life opportunities & success, movement toward a more reflective representation of the population being governed will lead to greater and uninterrupted respect for laws designed to protect all peoples' rights to life, liberty & the pursuit of happiness. Thanks again for a job well-done & for the inevitable positive impact your service has had - and will continue to have - on countless Hoosiers of all backgrounds & colors.

  3. Diversity is important, but with some limitations. For instance, diversity of experience is a great thing that can be very helpful in certain jobs or roles. Diversity of skin color is never important, ever, under any circumstance. To think that skin color changes one single thing about a person is patently racist and offensive. Likewise, diversity of values is useless. Some values are better than others. In the case of a supreme court justice, I actually think diversity is unimportant. The justices are not to impose their own beliefs on rulings, but need to apply the law to the facts in an objective manner.

  4. Have been seeing this wonderful physician for a few years and was one of his patients who told him about what we were being told at CVS. Multiple ones. This was a witch hunt and they shold be ashamed of how patients were treated. Most of all, CVS should be ashamed for what they put this physician through. So thankful he fought back. His office is no "pill mill'. He does drug testing multiple times a year and sees patients a minimum of four times a year.

  5. Brian W, I fear I have not been sufficiently entertaining to bring you back. Here is a real laugh track that just might do it. When one is grabbed by the scruff of his worldview and made to choose between his Confession and his profession ... it is a not a hard choice, given the Confession affects eternity. But then comes the hardship in this world. Imagine how often I hear taunts like yours ... "what, you could not even pass character and fitness after they let you sit and pass their bar exam ... dude, there must really be something wrong with you!" Even one of the Bishop's foremost courtiers said that, when explaining why the RCC refused to stand with me. You want entertaining? How about watching your personal economy crash while you have a wife and five kids to clothe and feed. And you can't because you cannot work, because those demanding you cast off your Confession to be allowed into "their" profession have all the control. And you know that they are wrong, dead wrong, and that even the professional code itself allows your Faithful stand, to wit: "A lawyer may refuse to comply with an obligation imposed by law upon a good faith belief that no valid obligation exists. The provisions of Rule 1.2(d) concerning a good faith challenge to the validity, scope, meaning or application of the law apply to challenges of legal regulation of the practice of law." YET YOU ARE A NONPERSON before the BLE, and will not be heard on your rights or their duties to the law -- you are under tyranny, not law. And so they win in this world, you lose, and you lose even your belief in the rule of law, and demoralization joins poverty, and very troubling thoughts impeaching self worth rush in to fill the void where your career once lived. Thoughts you did not think possible. You find yourself a failure ... in your profession, in your support of your family, in the mirror. And there is little to keep hope alive, because tyranny rules so firmly and none, not the church, not the NGO's, none truly give a damn. Not even a new court, who pay such lip service to justice and ancient role models. You want entertainment? Well if you are on the side of the courtiers running the system that has crushed me, as I suspect you are, then Orwell must be a real riot: "There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever." I never thought they would win, I always thought that at the end of the day the rule of law would prevail. Yes, the rule of man's law. Instead power prevailed, so many rules broken by the system to break me. It took years, but, finally, the end that Dr Bowman predicted is upon me, the end that she advised the BLE to take to break me. Ironically, that is the one thing in her far left of center report that the BLE (after stamping, in red ink, on Jan 22) is uninterested in, as that the BLE and ADA office that used the federal statute as a sword now refuses to even dialogue on her dire prediction as to my fate. "C'est la vie" Entertaining enough for you, status quo defender?

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