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. This is ridiculous. Most JDs not practicing law don't know squat to justify calling themselves a lawyer. Maybe they should try visiting the inside of a courtroom before they go around calling themselves lawyers. This kind of promotional BS just increases the volume of people with JDs that are underqualified thereby dragging all the rest of us down likewise.

  2. I think it is safe to say that those Hoosier's with the most confidence in the Indiana judicial system are those Hoosier's who have never had the displeasure of dealing with the Hoosier court system.

  3. I have an open CHINS case I failed a urine screen I have since got clean completed IOP classes now in after care passed home inspection my x sister in law has my children I still don't even have unsupervised when I have been clean for over 4 months my x sister wants to keep the lids for good n has my case working with her I just discovered n have proof that at one of my hearing dcs case worker stated in court to the judge that a screen was dirty which caused me not to have unsupervised this was at the beginning two weeks after my initial screen I thought the weed could have still been in my system was upset because they were suppose to check levels n see if it was going down since this was only a few weeks after initial instead they said dirty I recently requested all of my screens from redwood because I take prescriptions that will show up n I was having my doctor look at levels to verify that matched what I was prescripted because dcs case worker accused me of abuseing when I got my screens I found out that screen I took that dcs case worker stated in court to judge that caused me to not get granted unsupervised was actually negative what can I do about this this is a serious issue saying a parent failed a screen in court to judge when they didn't please advise

  4. I have a degree at law, recent MS in regulatory studies. Licensed in KS, admitted b4 S& 7th circuit, but not to Indiana bar due to political correctness. Blacklisted, nearly unemployable due to hostile state action. Big Idea: Headwinds can overcome, esp for those not within the contours of the bell curve, the Lego Movie happiness set forth above. That said, even without the blacklisting for holding ideas unacceptable to the Glorious State, I think the idea presented above that a law degree open many vistas other than being a galley slave to elitist lawyers is pretty much laughable. (Did the law professors of Indiana pay for this to be published?)

  5. Joe, you might want to do some reading on the fate of Hoosier whistleblowers before you get your expectations raised up.