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Protecting builder risks related to a project’s before and after

John Bleasby
Protecting builder risks related to a project’s before and after

Contractors need to proactively bookend their risks, both during the pre-bidding process and when completing project work. With so much attention paid to the activities during the actual build, it’s easy to gloss over the before and after.

Due diligence at the pre-bid stage can expose serious issues early. For example, unforeseen subsurface conditions could throw a wrench into a bid proposal. Protection might require contingencies written into proposals, such as Differing Site Conditions clauses.

“The purpose of the Differing Site Conditions clause is to allocate the risk for conflicting, inaccurate, or incomplete pre-bid information furnished by the project owner,” says Chicago-based law firm Seyfarth Shaw LLP.

For those clauses to be effective in practise, however, the contractor has several obligations to fulfil regarding proof. They must establish that the conditions encountered onsite were, in fact, different from what was indicated in the contract and were not foreseeable through information provided and relied upon. And of course, the contractor must establish “damage as a result of the material variation between the expected conditions and encountered conditions.”

Seyfarth Shaw says although standard practice may include preliminary site and soil boring reports, owners sometimes attempt to deflect their responsibility at the pre-bid phase by marking them, “For Information Purposes Only.”

“Contractors are well-advised to include clarifications in any bid based on contract documents that include disclaimer language, so as to preserve a potential claim down the road, in the event that there are material differences between what is represented by the owner and what actually lies beneath the surface.”

Contractors should also insist on a pre-bid site inspection and attend pre-bid meetings with designers. Failure to do so could leave contractors vulnerable to the assertion that they had, in effect, been put on notice that a site inspection might have revealed the differing conditions later encountered.

Seyfarth Shaw says the lesson is to “always send a knowledgeable and experienced representative to any pre-bid site visit, preferably someone who is not afraid to ask questions and shift the burden to the owner to clarify inconsistencies in the contract documents.”

After a project is completed, the standard Builder’s Risk insurance policy usually expires. However, under a wrap-up insurance policy, completed operations insurance covers a contractor’s liability for property damage or injuries once contracted operations cease.

In light of a recent case, Jean-François Landry of Montreal law firm Langlois reminds the importance of maintaining the complementary coverage associated with builder’s risk and wrap-up policies until a construction project is delivered in full.

“While performing the painting job on the project, an employee of the paint subcontractor struck the head of a sprinkler and caused water damage. On that date, the building in question was substantially occupied by the co-owners.”

The subcontractor GL carrier argued that the wrap-up carrier should cover the damages under the “completed operations hazard” insurance. Indeed, the subcontractor carrier relied on the “completed operations hazard” exception, which allows the exclusion for property damage to the construction project to be set aside when the claim arises from work that is completed or deemed to be completed.

Ultimately, the Court of Appeal found no evidence that the paint job had, in fact, been accepted by the owners at the time of the incident. Furthermore, “the certificate issued by the architect was supplemented by a list of deficiencies, specifying that much of the paint job was incomplete or needed correction. The Court of Appeal reasoned, it cannot be concluded that the architect had accepted the work by the date of the incident.”

It was therefore ruled that the subcontractor GL carrier should be held liable since the paint job was not deemed completed as per the “completed operations hazard”, and therefore no coverage was available under the wrap-up.

 “The issuance of a certificate of substantial performance of the work by the professional responsible for supervising the work and the occupation of the building cannot establish de facto the application of completed operations coverage in a wrap-up policy,” concludes Landry.

 John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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