Judges in East Baton Rouge and St. Tammany Parish have issued two of the earliest rulings on the impact of the Louisiana New Home Warranty Act on claims by homeowners against contractors for damages related to Chinese Drywall. Both state district court judges have found that the Louisiana New Home Warranty Act is the exclusive remedy as between a builder and a homeowner for damages caused by Chinese Drywall. Both judges have also ruled that the Chinese Drywall incorporated into homes in Louisiana is not a structural component of the home and is thus subject to a one year warranty period.

In both of the district court cases, the courts dismissed the plaintiff’s case because the suits against the contractors were brought more than one year after the homes were occupied by the original owners.

The rulings by the district court judges should have no impact on homeowner claims against suppliers and manufacturers of Chinese Drywall as the Louisiana New Home Warranty Act only applies to the relationship and rights between a home builder and a home owner in Louisiana.
 

A law passed by the Legislature and signed by Governor Bobby Jindal (Act 945) requires all bidders for public works contracts to certify that they have not entered a plea of either guilty or nolo contendre to certain crimes. Each bidder for public works contracts must certify in writing that they have not pleaded guilty or nolo contendre to: (1) public bribery (La. Rev. Stat. 14:118); (2) corrupt influencing (La. Rev. Stat. 14:120); (3) extortion (La. Rev. Stat. 14:66); or (4) money laundering (La. Rev. Stat. 14:230).

If evidence substantiates that a false attestation has been made and the project must be readvertised or the contract cancelled, the awarded entity making the false attestation shall be responsible to the public entity for the costs of rebidding, additional costs due to increased costs of bids, and any and all delay costs due to the rebid or cancellation of the contract.
 

A new law (Act 868) passed by the Legislature and signed by Governor Bobby Jindal on July 2, 2010 requires contractors who are awarded no-bid contracts with state and local entities, or $10,000-plus bid contracts with local entities, to disclose all commissions and fees in writing.

If the fee sharing changes, a new affidavit reflecting the changes is required and must be recorded by the contractor in the public record. If the recorded affidavit is determined to be incorrect, then the contract becomes null, and all payment of the commission, fee, or other consideration shall be rebated to the state or local entity that entered into the contract.
 

A new Louisiana law requires non-resident/out-of-state contractors to provide additional information before a building permit can be issued. The new law, amending La. Rev. Stat. 37:2171.2 (Act No. 67), has been signed by the governor.

It requires a non-resident commercial, residential, or home improvement contractor to provide (1) its federal tax payer identification number to the local building permit official and (2) proof of registration to do business in Louisiana before a building permit can be issued.
 

Since that time, a number of lawsuits related to Chinese drywall have been filed in various State and Federal Courts. 

In an effort to organize the numerous lawsuits that have been filed in Federal Courts, the Judicial Panel on Multidistrict Litigation recently issued a Transfer Order that class action suits filed around the country against Chinese drywall manufacturers would be docketed in the Eastern District of Louisiana.

The United States Judicial Panel on Multidistrict Litigation is an entity of the United States Federal Court System.  It was created by Congress in 1968 under 28 U.S.C. §1407.  The Panel has the responsibility of determining whether civil actions pending in two or more federal judicial districts should be transferred to a single federal district court for pretrial proceedings.  When asked to consider a transfer, the Panel will:

1. determine whether civil actions pending in different Federal district courts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings; and

2. Select the judge or judges and court assigned to conduct such proceedings.

[United States Judicial Panel on Multidistrict Litigation]

The rationale behind combining the lawsuits in this way for pretrial proceedings is to avoid discovery duplication, to prevent inconsistent pretrial rulings; and to conserve the resources of the parties, their counsel, and the judiciary.  Generally, the court will set standing orders or pretrial orders informing the lawyers involved of the ground rules, deadlines and procedures the court expects the litigants to follow.  After discovery and completion of pretrial matters, the case will be remanded back to the transferor court for trial.

While the Transfer Order for the Chinese drywall cases listed only ten cases, it is likely that the many other cases filed will be considered tag – along cases.  A case may only be characterized as a "tag-along action" if it involves "common questions of fact with actions previously transferred" under 28 U.S.C. § 1407.  See, Rule 1.1 of the General Rules for Judicial Panel on Multidistrict Litigation for the definition.  Upon learning of the pendency of a potential “tag-along action,” as defined in Rule 1.1, an order may be entered by the Clerk of the Panel transferring that action on the basis of the prior hearings and for the previously expressed reasons of the Panel.  The Panel then issues a Conditional Transfer Order transferring to the court tag-along actions that the Panel determined has “questions of fact common to the actions previously transferred”.  The order does not become effective until it is filed with the transferee district court.  The transmittal of the order to the transferee district court shall be stayed fifteen days from the entry thereof and if any party files a notice of opposition with the clerk of the Panel with in this fifteen day period, a stay will be continued until further order of the Panel. [See Rule 7.4 of the General Rules for Judicial Panel on Multidistrict Litigation]
 

The Louisiana Legislature has adopted House Concurrent Resolution No. 185, authored by Representative Tim Burns.  The resolution urges and requests that the Department of Health and Hospitals and the Deptartment of Insurance, in consultation with the Louisiana State Licensing Board for Contractors, investigate the health risks associated with living in homes that contain drywall imported from China, study the potential homeowners insurance coverage issues, including triggers, endorsements, and exclusions to policies that are related to drywall imported from China, and determine whether such material should be identified as a substandard, unsafe building material.  The resolution goes on to request a report of the findings and recommendations of this study to the legislature prior to the convening of the 2010 regular session.

A copy of the enrolled version of the resolution can be seen here: Download file

In a perfect world, Contractors would only do business with owners, designers, subcontractors, and material suppliers that they know well and trust. No surprises, misunderstandings, or disasters.

In this world, doing business is risky. The trick is to identify and analyze as many of the risks as you can, so that when you take a risk, you know what the risk is, and have some ideas about how to deal with it, should things go badly.

Here are three risks that you always want to identify and analyze:
 

2. What is the history of the building where you are working? Are those asbestos tiles? Is that mold in the corner? The last thing you need is to get into a project and be shut down because you are not licensed to do critical path work.

3. What is the building user’s business? What happens in the building? If you are contracting with the building owner, does the prime tenant’s business keep you from working 9:00-5:00 Monday to Friday? Are there medical records or other confidential documents for which special accommodations must be made? Is there sensitive equipment that your demolition crew needs to know about?

It is hard enough just doing the work that you think you are agreeing to do. Make sure that you are not taking on other problems too.

As Insurance claims continue to be adjusted and paid out, Louisiana residential, commercial, and industrial property owners will begin the process of contracting with Contractors to repair hurricane damage. As you do so, be mindful of Louisiana’s Contractors’ Licensing law and its potential impact on you. First, know that the purpose of the licensing law is to protect Louisiana’s citizens by attempting to ensure that contractors have at least a minimal level of financial resources and insurance coverage, basic construction knowledge, and some accountability for their financial obligations. The benefit to citizens is the initial screening or weeding out of contractors that have absolutely no business in that business. It’s not foolproof, but it does help.
 

What does the Licensing Law Require? The fundamental requirement of the Licensing law is its requirement only a licensed contractor may contract for a commercial or residential construction project of over $50,000. It also provides that for a residential project of over $7,500, the residential contractor be a registered home improvement contractor, and that there be a written contract. Any contractor remediating mold or asbestos must be licensed, regardless of the value of the project.

Where the licensing board discovers or suspects a violation of the licensing law, it can issue a “Cease and Desist” order requiring the project to stop in its tracks. It also has a relatively quick and easy path through the judicial system to seek civil and even criminal penalties for violations.

How do you know if a contractor is licensed? Some of the simplest ways are to contact the Board by phone or email through the contact information provided at their website.  Or, you can search the database maintained by the Board . 
 

A number of construction industry trade groups or associations, such as the American Institute of Architects (AIA) and the Design-Build Institute of America (DBIA), among others, have developed a variety of “standard form” construction contracts that have been used in the industry for many years, and are periodically updated. When engaging an architect or contractor, many owners are requested to sign these standard form agreements.  

But owners should avoid signing the standard form agreement without modifying the more heavy-handed, contractor-friendly provisions to make them fairer to the owner. For instance, the standard form agreements typically allow the contractor to recover delay damages and extend the contract time for completing the work, if the owner delays the contractor’s work. Construction projects can require significant orchestration of effort, and the possibility of owner delay is common and sometimes cannot be controlled by the owners. Thus, we recommend modifying the standard form agreements to provide that an extension of time shall be the contractor’s sole remedy for the owner’s delay.   There are a number of other provisions that allow the contractor to recovery damages for other types of delay, and likewise, we recommend a similar modification. This is just one example of a number of provisions that we recommend modifying when we represent the owner.

In addition to making the standard form agreements more owner-friendly, we also recommend modifying them to reflect the owner protections afforded under the Louisiana Private Works Act. This Act allows subcontractors and suppliers to place a lien on the owner’s property if the contractor fails to remit payment. It also allows the owner to protect itself against such liens by requiring the contractor to obtain a bond and file certain notices in the public records. The standard form agreements, without modification, do not require the contractor to comply with these requirements.

In sum, we highly recommend modifying the industry standard forms to protect the owner. The modifications are typically reflected in an addendum to the standard forms. Contractors are well-versed in these forms, are regularly asked modify them, and should be willing to do so in effort to make the agreement more balanced. 

Much of the time of a construction lawyer is spent assisting clients in finding solutions to the many problems that befall the typical construction project. These problems range from simple contract preparation and negotiation to the more fact-intensive work of constructive defect litigation, surety claims, liens, and payment issues. Each construction project, no matter how complex or simple, involves the same basic issues:

• What is the scope of work that the parties agreed to?

• What documents or plans define the scope of work?

• How is the contractor to be paid for his work?

• How can the owner be assured that the contractor is doing the work properly?

• What is to be done when there are issues or problems with respect to any of the above?

The job of the construction attorney is to help chart a course through this minefield and ideally resolve issues without judicial intervention.

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For more information, contact a member of the Kean Miller Business and Corporate team, or send an email to client_services@keanmiller.com.

A recent case out of Louisiana could be big news for general contractors, owners, and insurers. Louisiana's Second Circuit Court of Appeals agreed with a lower court's opinion that an upstream contractor was entitled to insurance coverage for the cost of repairing defective work performed by a subcontractor (Broadmoor Anderson v. National Union Fire Insurance of Louisiana).

After construction was completed, the owner began to notice problems with the ceramic tile shower stalls in many of the guest rooms. It was determined that the leaks were caused by defective workmanship in the installation of the shower pans, and the general contractor and subcontractor collaborated on a remediation of the problem.

Shortly after the repair efforts began, the general contractor made a formal demand on the CGL carrier for the cost to the general contractor for the remediation, alleged to be nearly $1,500,000.00. Ultimately, the general contractor filed a lawsuit against the insurer, and obtained a summary judgment against the insurer finding coverage. The Second Circuit affirmed this decision, but remanded the case to the lower court for a determination of the proper amount of coverage.

This is a very important decision because it provides a potential way around a line of cases dating back to at least 1965 which hold that a contractor is not entitled to insurance coverage under a CGL policy for property damage caused by the contractor's own defective performance. The common refrain in these cases is that "a CGL policy is not intended to serve as a performance bond."

The ruling in Broadmoor Anderson does not directly affect that rule, because the downstream contractor which is responsible for the defective work is not going to be entitled to any insurance coverage. Broadmoor Anderson does, however, provide a potential roadmap around those cases where the fact pattern is sufficiently similar - (1) is a CGL policy which names the upstream contractor as an insured or additional insured, (2) damage caused by defective work by a downstream contractor, and (3) the CGL policy provides coverage for completed operations.

This precedent could be of tremendous benefit to owners and contractors by providing for insurer supplied financing for remediation of property damage caused by the defective workmanship of a downstream contractor. The insurer's recourse, however, may be a demand against the contractor guilty of the defective performance, seeking to recoup the insurer's costs.

The Opinion notes that as of the date of this comment, November, 1, 2005, it has not been released for publication in the permanent law reports, and as such, is subject to revision or withdrawal. Additionally, because of the procedural posture of the case, the Supreme Court could still reverse the Second Circuit, and other Appellate Courts could come to a contrary conclusion. Nevertheless, the opinion opens a new door for owners and contractors dealing with the unfortunate situation of remedying defective workmanship of a downstream contractor.

Hurricane Katrina will undoubtedly go down in history as the worst natural disaster to hit the United States. The current estimated cost to repair damage from Hurricane Katrina caused has reached $50.0 billion, much of which may be covered by insurance. Hurricane Katrina will have enormous impact on policyholders and their insurers in Louisiana, Mississippi, and Alabama. Policyholders will need to act carefully and in some cases promptly to protect their rights under insurance policies providing coverage for environmental claims, business interruption claims, property loss claims, and general liability claims.

Hurricane Katrina's rains, floods, and wind damage have caused a multitude of small and large environmental accidents. Businesses that are generally concerned with environmental accidents--chemical plants, manufacturing companies, oil and gas producers, and gasoline stations are not the only businesses that may be exposed to environmental claims. Car dealerships, hardware stores, pest control companies, dry cleaners, and any business which may house, store, or sell chemicals of any kind are subject to liability for environmental accidents. Most current environmental coverage is written on a claims made basis and requires that notice of an environmental accident be given within 30-days of the accident.

Property Damage.

Damage to property caused directly by wind and water (which did not carry chemical or environmental type damages) should be covered by property insurance policies and/or flood insurance. Flood insurance may be provided as an endorsement to a general property policy; in some cases, a separate flood policy may be necessary. Documentation of the type of property damage sustained is important particularly where multiple policies providing coverage are involved or where a single policy has multiple deductibles and multiple coverage limits.

Insurers providing wind and rain property damage coverage may claim that all or most property damage was caused by rising waters/floods. It is also possible that carriers providing flood insurance will take the position that at least some of the damage was caused by wind and rain. The "finger pointing" in a dispute often delays payments and resolution of claims and may lead to litigation. Carriers may also attempt to allocate large losses to particular portions of a policy that have the lowest policy limits.

Business Interruption Coverage

Coverage is generally incorporated as a rider or endorsement to property policies although stand alone coverage is available. Business interruption claims are often difficult to quantify in the early stages of a disaster. Determining how long the business is interrupted, how much it will reasonably cost to get the business running again, and the amount of lost profits are issues which are often disputed by the insurance carriers. Generally, physical damage to a business property is needed to trigger business interruption coverage. One exception to this requirement is the loss of use of a property due to an order by a civil authority. For example, buildings located in New Orleans which may not be damaged may have limited coverage for business interruption due to the order to evacuate.

General Liability Coverage.

General liability coverage may provide additional coverage for third-party claims arising out of damages caused by Hurricane Katrina. General liability policies provide broad coverage and should be reviewed before making claims under other policies providing specific coverage.

Notice and Proof of Loss.

Before noticing an insurer, a policyholder should carefully review all policies to determine notice requirements and to become familiar with the policy's terms and conditions. Statements contained in notice letters can be used by the insurer to trigger or deny coverage. Such statements under one policy might affect (but not necessarily provide) notice under other policies. Specific attention should be given to the number of days between an occurrence and when a claim must be made. This is particularly true in environmental claims. On a claims-made policy, the ending date of the policy is important. Failure to make a claim during the policy period on a claims-made policy may destroy a policyholder's right to make a claim on the policy.

Conclusion.

On large and/or complex claims, especially environmental claims and business interruption claims, it is often advisable to seek professional help from coverage attorneys, accountants, environmental consultants, and appraisers to develop claims and to provide support during the ongoing and often lengthy claims process. Coverage attorneys and supporting experts should be considered as a part of making any large or complex claim on one or more policies. Louisiana provides regulations and rules on claims handling and provides certain protection to policyholders.

Is it possibile that the contractual agreement limiting the time within which an owner must file suit to enforce a private works performance bond may be unenforceable in Louisiana? We cannot predict how a judge or jury would decide the issue but humbly suggest it is this type of gray area that warrants more consideration than it typically receives.

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