The New AIA Sustainable Project Contract Documents: A Good Basis for Managing Risk on Green Building Projects

With “green building” practices and projects becoming more mainstream across the country, it is more important than ever to account for the unique issues they raise.  Recognizing this need, the American Institute of Architects (“AIA”) introduced five new form agreements in the past year to be used on green building projects.  The new agreements are based on widely-used existing AIA form agreements, and incorporate much of the language and recommendations included in the AIA D503-2011 Guide for Sustainable Projects.  They have been drafted to accommodate the additional requirements imposed by new green building codes and third-party certifications, and clearly acknowledge that green building presents new roles, responsibilities, and risks in the design and construction industry.

The five new agreements are:

·         A101-2007 SP – Standard Form of Agreement Between Owner and Contractor, for use on a Sustainable Project where the basis of payment is a Stipulated Sum;

·       A201-2007 SP – General Conditions of the Contract for Construction, for use on a Sustainable Project; 

·       A401-2007 SP – Standard Form of Agreement Between Contractor and Subcontractor, for use on a Sustainable Project;

·      B101-2007 SP – Standard Form of Agreement Between Owner and Architect, for use on a Sustainable Project; and 

·         C401-2007 SP – Standard Form of Agreement Between Architect and Consultant, for use on a Sustainable Project.

The new agreements incorporate important new definitions and processes, most notably including the use of a “Sustainability Plan”.  The Sustainability Plan is prepared by the architect and identifies the project owner’s goals for green construction measures and certifications, outlines how those goals will be achieved, and describes the roles and responsibilities of the architect, contractor, and owner.  The Sustainability Plan also outlines specific details about design reviews, testing, or metrics to be used to verify achievement of green building goals; and the sustainability document required for a project.

For architects, the B101-2007 SP provides for new “sustainability services” in addition to basic services, and outlines substantial additional requirements regarding sustainability certification agreements, Sustainability Plan services (including conducting a “Sustainability Workshop”), design and construction Phases, project registration, and submissions of sustainability documentation to a certifying authority.  The architect must also discuss novel or untested materials or equipment with the owner and inform them of any potential impact on the Sustainable Objective if the product fails.  As provided for in the A201-2007 SP, a limitation of liability is included for the architect in the event of the failure of any such new materials or equipment chosen by the owner for the project.  The standard owner’s license with regard to Instruments of Service is also expanded to include submission to (and publication by, if necessary) a certifying authority to comply with certification requirements for a project.

For contractors and other parties in general, the A201-2007 SP includes a process for identifying the potential impact of material substitutions on green building objectives, the requirement that the contractor discuss novel or untested materials or equipment with the owner and architect to identify any potential impact on green building objectives, a limitation of liability for the contractor and architect if new and untested materials or equipment selected by the owner should fail, and an expansion of the standard waiver of consequential damages to include potential damages applicable to sustainable projects (such as unachieved energy savings, unintended operational expenses, lost financial or tax incentives, or unachieved gains in worker productivity).

For subcontractors, the A401-2007 SP contains additional provisions regarding recycling, reuse, removal, and disposal of materials, and requires the subcontractor to prepare a construction waste management and disposal plan setting forth the procedures and processes for salvaging, recycling, or disposing of construction waste.

Like all AIA form agreements, the new sustainable project contract documents are well thought out, and have been drafted to be appropriate for a wide range of projects.  However, it is important to account for the idiosyncrasies of each individual project, and of green building projects in particular, when preparing contracts.  Ideally, contracts for green building projects should identify a project owner’s expectations and goals for green building objectives, clearly designate the sustainability standard or rating system that a project is intended to achieve, identify any unusual or additional scopes of work for the architect, contractor, and their subcontractors and consultants, and provide for the use of new materials and building methods (and their potential failure).  The AIA sustainable project contract documents provide a solid basis for addressing these issues along with a framework for incorporating many other project considerations, making them a valuable tool for managing green building projects.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Risk Management for Condominium Conversions

One of the bright spots in the Colorado construction industry over the last few years has been the construction of for-rent apartments. It seems as though apartments are going up everywhere you look along the Front Range. As market forces change, it will be interesting to see whether these units will remain apartments or whether they will be converted into for-sale condominiums or townhouses. One of the risk management strategies we have recently discussed with our general contractor clients who have been asked to build apartments is to ensure that the project remains a for-rent apartment project through the applicable statute of repose, conservatively assumed to be eight years. Unfortunately this is not always feasible, usually because the owner and/or lender are not interested in encumbering the property for such a long period of time, and want to retain the ability to convert the project if and when market forces allow, even if that is before the running of the statute of repose. The purpose of this article is to discuss the insurance and risk management ramifications of converting a project too early.

I have recently heard from several sources in the insurance industry that there are owners and contractors who are currently building apartments with the idea that they will be held as apartments for two to three years and then converted to for-sale condominiums or townhomes. While this strategy may have great appeal from a business point of view, it has a very serious risk management downside. Apparently, these owners and contractors are operating under the mistaken belief that they will have no liability exposure to the ultimate purchasers of the converted units or to the homeowners association for construction defects. This is an incorrect belief. To be clear, the individual purchasers of the converted units and the homeowners association for the common interest community will both have the ability to sue the original developer and the general contractor for construction defects in original construction, so long as the claims are brought within the statute of repose, even though the units were rented as apartments prior to their conversion and sale. The individual owners and homeowners association may also have claims against the entity responsible for the conversion, marketing, and sale of the converted units, depending on the relationships between the parties and the process by which the apartments were converted and sold.

With that misconception cleared up, the next thing to consider is the insurance coverage available for and/or associated with these types of projects. Some of the apartment projects I have seen are being insured by a project specific policy, some written as a wrap policy, which provides coverage only so long as the units remain for-rent apartments. If they are converted to for-sale condominiums or townhomes, the policies specifically disclaim coverage. Worse yet, I have seen some insurance policies on the market, being considered for this type of project, that contain residential construction exclusions and specifically include for-rent apartments within the definition of residential construction. As a general contractor involved in a project like this, you must understand that there may be no insurance available to defend or indemnify you if the units are converted prematurely and the individual owners or HOA institute a construction defect action. Going bare on this type of a project is not a good idea, particularly where the general contractor has no control regarding whether and when the units may be converted.

The best risk management strategy in this type of scenario is to ensure, up front, either that the units cannot be converted prior to the expiration of the statute of repose or making sure that the proper insurance is in place, or can be purchased at the time of conversion, to cover the risk of a construction defect suit by individual owners or the homeowners association for the converted units. I have seen some insurance policies that explicitly cover the risk of conversion of apartments to for-sale products. If this type of policy is commercially available and priced reasonably, it is certainly worth a look. I have also seen insurance policies that will convert from a purely commercial policy, covering for-rent apartments only, to a residential policy, covering for-sale condominiums and townhomes, upon payment of additional premium. Prudent general contractors constructing under this type of policy should consider making the owners’ ability to convert the homes contingent upon paying the additional premium necessary to convert the policy to one that will provide protection from construction defect claims from the individual purchaser or homeowners association.

In these times, when apartments are going up as fast as the available work force will permit, it is important to look down the road to minimize or eliminate, to the greatest extent possible, the risk of construction defect claims should the apartments be converted prior to the expiration of the statute of repose. While there may be no easy answer and no cookie cutter solutions, going bare or building with a policy that will not cover converted units should not be an option. The risk is too great and there is no protection afforded the general contractor or developer merely because the units were rented as apartments before they are converted and sold.

David M. McLain is a founding member of Higgins, Hopkins, McLain & Roswell, LLC, a firm highly regarded for its expertise in construction law and the litigation of construction claims. HHMR represents a wide variety of clients, from individuals to small businesses to Fortune 500 companies.  For additional information regarding risk management for condominium conversions, you can reach David McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.

Acord Certificates of Liability Insurance: What They Don’t Tell You Can Hurt You

As anyone involved in construction knows, one of the most heavily used forms for tracking insurance information during the subcontracting phase of a project is the Acord Certificate of Liability Insurance. General contractors often require subcontractors to provide these ubiquitous forms as evidence that the subcontractor maintains adequate insurance or insurance which complies with the requirements of the subcontract. Unfortunately, experience has shown that the Acord forms being used today are insufficient sources of the information needed by the developer and general contractor.
 

Historically, developers and GCs would require Acord forms to ensure that a subcontractor had a CGL insurance policy, with sufficient limits, and which named them as additional insureds. More recently, developers and GCs took the additional step of requiring a confirmation on the Acord forms that they were named as additional insureds for both ongoing and completed operations. This is important because coverage for ongoing operations only provides coverage during the construction process. Once the homes are put to their intended use, developers and GCs must be named as additional insureds for completed operations also in order to avail themselves of the benefits of the policy. Unfortunately, this is where the evolution of the use of the Acord forms ended, resulting in a failure to provide sufficient information to protect developers and GCs from the unknown.

My firm has had a rash of recent experience where our clients have not obtained the benefit of additional insured coverage for which they bargained because they relied on Acord forms which failed to provide sufficient information to allow them to protect themselves from insufficient insurance coverage on the part of the subcontractors with which they did business. For example, in one recent case a homeowners association alleged insufficient grading and drainage away from the homes within a development built by one of our clients. In reviewing the insurance information from the construction files, we found the Acord forms from the excavating company that performed all of the grading work around the homes. To our delight, the Acord form listed our client as an additional insured for both ongoing and completed operations. We timely tendered our client’s defense to the excavating subcontractor’s carrier as an additional insured, only to have our client’s defense declined because the excavating subcontractor had an earth movement exclusion on its policy. This exclusion was not disclosed on the Acord form provided.

Unfortunately, information related to exclusions or endorsements are rarely included on Acord forms even though they can have a very negative impact on the insurance a developer or GC thought it was obtaining through its subcontractors. We have seen other examples where carriers have denied tenders of defense and indemnity because of unknown exclusions in policies, such as a roofer that had a residential exclusion, an EIFS installer that had EIFS and mold exclusions, and a framing subcontractor that had a construction defect exclusion.

In order to protect our clients from the unknown, we recommend that in addition to requiring and maintaining Acord forms from their subcontractors, they require their subcontractors’ insurance agents to complete, sign, and return subcontractor insurance compliance forms. These forms have been developed to get additional information regarding the pertinent exclusions and endorsements on the subcontractors’ insurance policies and to ensure that developers and GCs know, for example, whether their excavating subcontractor has an earth movement exclusion. In addition to the benefit of being able to make sure subcontractors have adequate insurance coverage for the work they are performing, use of these forms also provides an additional source of recovery if it is later discovered that the insurance agent misrepresented the subcontractor’s insurance coverage. If it did, and there is no insurance available to cover a risk, there is a claim against the insurance agent for negligent misrepresentation, which may be covered by his or her errors and omissions policy.

Having never been responsible for obtaining and maintaining Acord insurance forms myself, I can only imagine what a Herculean task it must be to keep track of them for every project, through the statute of repose. (Someone is doing this at your company, right? If not, someone should.) Unfortunately, the use of subcontractor insurance compliance forms only increases the work required to track insurance, and for that I apologize. Based on experience, though, the effort is worth the reward. Not only will your subcontractors have the insurance needed to protect them, and you, from the risk of a construction defect claim down the road, you will avoid having any unwelcomed surprised in the event such a claim arises.

-         David M. McLain is a founding member of Higgins, Hopkins, McLain & Roswell, LLC, a firm highly regarded for its expertise in construction law and the litigation of construction claims. HHMR represents a wide variety of clients, from individuals to small businesses to Fortune 500 companies. For additional information regarding the Acord Insurance Forms, you can reach David McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.