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New DC Circuit Standing Decision

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On August 26, 2014, the D.C. Circuit Court of Appeals decided the case of Sierra Club, et. al. v. Jewel, a case involving the National Register of Historic Places (Register), which is administered by the Department of the Interior. The Court of Appeals held, over the dissent of Senior Circuit Judge Sentelle, that the plaintiffs, a coalition of environmental groups and historic preservation organizations, have standing to challenge the decision of the Keeper of the Register that the "Blair Mountain Battlefield", the scene of a historic and violent encounter between coal miners and coal companies in the 1920's, and located in Logan County West Virginia, should not be included in the Register because the initial listing process was defective.

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Ohio Supreme Court Announces Rule for Pay-if-Paid Provisions

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Last month, in its decision in Transtar Electric, Inc. v. A.E.M. Electrical Services, Corp., Slip Opinion No. 2014-Ohio-3095, the Ohio Supreme Court ruled that the inclusion of term "condition precedent" in a contractual payment provision was an explicit statement of the parties' intent to transfer the risk of the project owner's non-payment from the general contractor to the subcontractor. This decision is significant for Ohio, a state that enforces the validity of pay-if-paid provisions, unlike other states that have found them void as against public policy.

Transtar involved a contract between a general contractor and an electrical subcontractor for the construction of a pool at a Holiday Inn. The subcontractor fully performed its work under the subcontract, but the general contractor failed to pay the last three of the subcontractor's invoices because the owner had not paid the general contractor for the work reflected in those invoices. The subcontractor filed suit alleging both breach of contract and unjust enrichment, and both sides moved for summary judgment. While the general contractor did not dispute the facts asserted by the subcontractor, it argued that, under the contract, it did not have to pay the subcontractor until it received payment from the owner. The trial court agreed with the general contractor, but the appeals court reversed, stating that the contract's payment provision was not sufficient to shift the risk of non-payment by the owner to the subcontractor. The Ohio Supreme Court then reinstated the judgment of the trial court.

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California Supreme Court provides a Beacon of hope for condominium association claims against design professionals

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In an opinion filed July 3, 2014, the California Supreme Court provided some clarification to California law concerning an architect's liability to foreseeable third-party purchasers of residential units for design errors and omissions. In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP (July 3, 2014) ____Cal.4th ____; 2014 WL 2988058, Cal. July 03, 204 (NO. S208173), the Court held that a principal architect (defined by the Court as an architect who in providing professional design services is not subordinate to other design professionals) of a residential project owes a duty of care to future homeowners.

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NJ Trial Court Dismisses Condo Association's Defect Claims

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In late March, a trial court in Bergen County, New Jersey dismissed a condominium association's construction defect claims against several construction entities for failure to comply with the applicable statute of limitations. This decision's appellate aftermath will be interesting to follow, because the trial court stripped away some of the protection that New Jersey's discovery rule affords to property owners who become aware of latent defects well after a project is substantially completed.

Pursuant to the discovery rule, "a cause of action will be held not to accrue until the injury party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim." Lopez v. Swyer, 62 N.J. 267, 272 (1973). And unlike some states, New Jersey's discovery rule applies in contract cases involving latent construction and design defects. Torcon, Inc. v. Alexian Bros. Hosp., 205 N.J. Super. 428, 432 (Ch. Div. 1985). What this means is that the statute of limitations for design deficiencies and construction defects begins to run upon substantial completion. Mahoney-Troast v. Supermarkets General, 189 N.J. Super. 325, 329 (App. Div. 1983).

In Palisades at Fort Lee Condo. Ass'n v. 100 Palisade, 2014 N.J. Super. Unpub. LEXIS 743, *3 (Law Div. Mar. 31, 2014), construction was deemed substantially complete on May 1, 2002. The Association hired a consultant to perform inspections in November 2006, and in May 2007, the consultant issued a report identifying various construction and design defects. The Association, however, did not file a Complaint until March 2009, almost seven years after the date of substantial completion. The trial court held that although the Association's claims may not have accrued until May 2007, when it received the report, it still had until May 2008 to file suit. The trial court stated, "[i]t has been well established in New Jersey case law that if the plaintiff has sufficient knowledge of its claim and there remains a reasonable time under the applicable limitations period to commence a cause of action, the action will be time barred if not filed within that remaining time." Id. at *8. One of the reasons the court dismissed the Complaint is because the Association had one year to file suit after becoming aware of its potential claims.

The Palisades court cited to Torcon (another trial court opinion) for this proposition, although the Torcon court's holding in this regard related to application of equitable estoppel in the context of a contractor's misrepresentation or concealment of material facts. By contrast, the intent of New Jersey's discovery rule is to toll the accrual of the statute of limitations, and the Association's six-year statute of limitations should have commenced in May 2007, if that is the date when it knew or should have known that it may have claims arising out of defective construction.

Nevertheless, the Palisades decision should give pause to property owners and their attorneys to carefully monitor early signs of faulty workmanship, and to not assume that the discovery rule will automatically extend the six-year time period to bring claims for construction defects. A Notice of Appeal has been filed in Palisades and it will be interesting to see how the Appellate Division handles this issue.

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Common Interest in Common Interest Developments

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Protecting communications disclosed to third-parties under the common interest doctrine can be an uphill battle. Was the communication reasonably necessary for the purposes for which the attorney was consulted? Was there a reasonable expectation the communication would remain confidential? Was the content of the communication of the type that should be afforded protection? In the context of construction defect litigation, homeowners associations are often placed in a "common interest" predicament:

Association bylaws and the California Civil Code require the association to keep individual homeowners abreast of details regarding construction defect litigation. The individual homeowners are not the clients of the association's lawyer - the association is. Does complying with pertinent statutory and association-specific requirements result in a waiver of privileged information?

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Dial back that hyperbole, or it could really hurt you

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One of the first tactical lessons most litigators learn is not to overstate your position. Another lesson is to always remain civil, even in the face of an un-civil opponent. These lessons are sometimes difficult for young lawyers, brimming with aggression, to digest. Most of the time when one of those lawyers inserts unfortunate language in a brief--say, openly mocking the opponent's argument--cooler heads prevail and a sage senior lawyer excises the offending language.

Most of the time. But not all of the time. This short Sixth Circuit opinion, Bennett v. State Farm Mutual Insurance is a good lesson to young lawyers. I can't deliver a judicial bench slap any better than the court, so let me just quote Judge Kethledge:

"There are good reasons not to call an opponent's argument "ridiculous," which is what State Farm calls Barbara Bennett's principal argument here. The reasons include civility; the near-certainty that overstatement will only push the reader away (especially when, as here, the hyperbole begins on page one of the brief); and that, even where the record supports an extreme modifier, "the better practice is usually to lay out the facts and let the court reach its own conclusions." Big Dipper Entm't, L.L.C. v. City of Warren, 641 F.3d 715, 719 (6th Cir.2011). But here the biggest reason is more simple: the argument that State Farm derides as ridiculous is instead correct."

Ouch. Whatever feeling of satisfaction that lawyer had when he wrote "ridiculous" in his brief must have felt worlds away when he read that opinion.

There's another lesson here: Always carefully review defined terms in your insurance policy. In Bennett, "The question presented is whether Bennett was an "occupant" of the Fusion--as that term is defined by State Farm's policy--at the time she was on the vehicle's hood. If she was, then she is entitled to coverage for the injuries she sustained there; if not, then not." The policy defined "occupying" as "in, on, entering or alighting from." Since Mrs. Bennett was "on" the car, she was "occupying" it as defined by the policy.

One last lesson for insureds: Don't give up too easily. It would have been very easy for Mrs. Bennett to hang her head when State Farm denied her claim because she was on the hood, and wasn't an "occupant" of the car. But she stuck with it and pressed her case. Good for her.

Owner-Operated Businesses With No Employees May Be Surprised By Recent Cal AG Opinion

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UPDATE: The Sacramento Bee, E-cigarettes face restrictions as cities update smoking ordinances (Mar. 10, 2014)

Recently, the California Office of the Attorney General ("AG") issued its Opinion No. 12-901 (Dec. 20, 2013), answering the question: "Under what circumstances does an owner-operated business with no employees nevertheless constitute a 'place of employment' under Labor Code section 6404.5, which prohibits smoking in a workplace?" Section 6404.5 provides, in relevant part: "No employer shall knowingly or intentionally permit, and no person shall engage in, the smoking of tobacco products in an enclosed space at a place of employment." smoking.jpg The AG confirmed that "[a]n owner-operated business with no employees nevertheless constitutes a 'place of employment' under [S]ection 6404.5 when employment of any kind is carried on at the business location -- that is, even when such employment is carried on by persons who are employed by someone other than the business owner." As a result, "if employment is being carried on in an owner-operated business, then the owner-operator and all other persons are forbidden from smoking in any enclosed space therein, whether or not the owner-operator is the direct employer of those carrying on the employment."

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Bidding on California Public Projects Not a "Fundamental Vested Right": The Case of the $915 Debarment

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California contractors who violate prevailing wage laws do so at their peril. A recent case, Ogundare v. Department of Industrial Relations (2013) 214 Cal.App.4th 822, held that a one year debarment from bidding on public projects did not implicate a "fundamental vested right." Consequently, trial court review of a Division of Labor Standards Enforcement decision imposing debarment should have been more deferential to the DLSE decision, evaluating whether substantial evidence supported the decision rather than exercising its independent judgment on the evidence.

In a hearing before the DLSE, a laborer presented his paystub showing that he had worked 61 hours for a contractor in a particular week for $915, or $15/hour. The certified payroll submitted by the contractor to the public owner for that week showed that the laborer had worked 25 hours at the prevailing wage of $36.10/hour. On the basis of this and additional evidence that two other workers had not been paid overtime, the DLSE ordered a one-year debarment of the contractor for commiting willful violations of California's prevailing wage law with intent to defraud.

When the contractor sought mandamus to set aside the debarment order, the trial court assumed that the right to bid on public projects was a "fundamental vested right." It then applied its independent judgment to the facts and found no "credible evidence . . . of an intent to defraud" and that willfulness alone was insufficient to support debarment under the relevant statute.

On appeal by the DLSE, the court found that the right to bid on public projects was not a "fundamental vested right"--the contractor was not prohibited from working on all projects, only public ones, and therefore the interest involved was instead "purely economic." This distinction is critical--administrative adjudications affecting only "purely economic" interests are reviewed under the much more deferential substantial evidence test (phrased in one case as "unless the finding . . . is so lacking in evidentiary support as to render it unreasonable, it may not be set aside."). The court then applied the substantial evidence standard, and despite the contractor's pleas of clerical error and lack of intent to defraud, remanded to the trial court to affirm the debarment.

Trigger happy NJ Supreme Court allows two carriers of the same insured to sue each other

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What if you get sued for property damage that occurred progressively over the course of two years, and you had separate GL policies for each year? Do you get the benefit of coverage for both years, or just the first year? Well, if you're in New Jersey, you get coverage for both years, which generally will mean twice the limits, thanks to Potomac Ins. Co. of Ill., ex rel. One Beacon Insurance Company v. Pennsylvania Manufacturers Association Insurance Company, a case the New Jersey Supreme Court handed down earlier this week.

But what if one of the carriers provides a defense to the lawsuit, but the other refuses? Under One Beacon the carrier that provides a defense can sue the carrier that doesn't. Time will tell the effect of that. One danger might be that carriers become reluctant to settle with insureds in a continuous loss case because of the risk of later being sued for more money by a co-insurer. Alternatively, it may - as the New Jersey Supreme Court believes - promote early settlement, as an insurer that anticipates paying an allocated portion of defense costs may factor those costs into a potential resolution of the underlying claim and will be incentivized to seek earlier settlement.

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Replacement cost property policies cover contractor's OH&P -- says Florida Supreme Court

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The Florida Supreme Court gave insureds a Fourth of July present one day early -- July 3 -- by ruling that property policies providing replacement cost coverage include the cost of a contractor's overhead and profit, even if the insured does not actually pay a contractor overhead and profit to replace the damaged property. We'll explain the decision, Trinidad v. Florida Peninsula Insurance Company, in detail after the jump, but first some commentary.

We've often seen this issue in the "no good deed goes unpunished" situation where a contractor steps in to perform repair work on a builders risk policy and the carrier refuses to pay the contractor's overhead and profit. If the contractor did not perform the repairs, either the owner or the carrier would have to hire a different contractor who was not already on site to mobilize to the site and perform the repair work. The carrier would obviously have to pay that contractor overhead and profit. And that contractor would be much less efficient and more expensive. But the carrier tries to take advantage of the original contractor's willingness to step in by carving overhead and profit off the payout.

This Florida Supreme Court decision validates our position: A carrier must pay the overhead and profit whether or not the insured actually pays a contractor to do the work. Now, for the details.

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California Court Orders Judicial Review of Arbitrator's Decision Not to Order Disgorgement from Unlicensed Contractor

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A recent California case, Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, held that an arbitrator's refusal to apply California's disgorgement remedy against an unlicensed contractor was subject to judicial review even if the underlying agreement was not entirely void.

Two adjacent landowners formed a limited liability company to develop condominiums on the combined property. The LLC's operating agreement provided that the LLC would hire a contractor owned by the managing member to construct the project. The contractor was not to receive any direct payment for its work. Instead, the agreement provided that the managing member would receive a greater credit to his capital account based on the construction price, and a correspondingly greater share of the profits.

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That's not what I meant either! -- Ambiguous drafting thwarts (one party's version of its) intent, again

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A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter's precision carrying the day most of the time, sometimes a litigator's creativity can trump it. Well, it's happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it's the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it's unpublished.

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That's not what I meant! The drafter's (apparent) intent thwarted again.

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I occasionally give a presentation called "That's not what I meant!" which is subtitled "Usually the drafter's precision carries the day, but sometimes the litigator's creativity trumps it." Our legal system generates seemingly endless material for this presentation and last week the Eighth Circuit gave us more in Union Electric v. AEGIS Energy Syndicate. The policy had a mandatory arbitration provision, but an endorsement specified that Missouri law governed and a Missouri statute prohibits mandatory arbitration of insurance disputes, so while the carrier wanted to compel arbitration, Judge Jean Hamilton refused and the Eighth Circuit affirmed her decision. So, the drafters may have intended that any disputes would be arbitrated, but if so, they should have done some more homework.

There are a couple of lessons here. First, read the entire policy, including the endorsements. The endorsements are like change orders to construction contracts and until you've read them, you don't know what the policy provides for. Second, just because a policy (or any other contract, for that matter) says something doesn't mean it has to be. Many common contractual clauses are rendered unenforceable by either caselaw or statutes. Third, because insurance policies are governed by state laws, and in light of the differing interpretations and statutory schemes amongst the states, there can be wide variations of the procedural and substantive effect of policies depending on what state's law governs. So, do your homework.

Defects in an insured's own work are "unmistakably included" in the definition of "occurrence" in CGL policy, rules Second Circuit.

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The Second Circuit's recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court's grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured's defense, after concluding that the district court erred when it ruled that a swimming pool contractor's liability for cracked concrete could not be covered by its insurance. The district court relied on the "your work" exclusion, but in doing so, it read the "subcontractor exception" out of the policy. The Second Circuit put it back in.

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Denying Coverage Based on the Insured's Lack of Cooperation - A Difficult Standard for Insurers to Meet

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An insured's duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer's ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.

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