Construction Law Practice

Construction News FALL 2004

Congratulations to the Chair of Jenner & You Can’t Have Your Cake Block's Construction Law Practice, And Eat It Too: “Optional” Joseph G. Bisceglia, who was recently elected Third Vice- Liquidated Clauses President of the Illinois State Bar Association (ISBA) and will automatically assume the posi- Are Unenforceable tion of President in 2007. Mr. Bisceglia has a long history of involvement in the ISBA during his 30 years of practice in Construction often Resource’s repeated delays, the commercial and construction litigation at include “liquidated damages” parties amended their to Jenner & Block. Mr. Bisceglia is the clauses. A proper liquidated add a liquidated damages clause. third Jenner & Block lawyer to be elected damages clause is meant to Id. at *1. The liquidated damages President of the ISBA. The first was memorialize the parties’ clause stated: Judge Floyd Thompson. The second was name Partner Albert E. Jenner, Jr. agreement in advance as to the amount of damages that will arise Liquidated Damages Payment. from a . If Contractor fails to commence However, those in the commercial operation of the Table of Contents construction industry need to be Gas-to-Electric Plant on or mindful that an improperly worded before the date specified in You Can’t Have Your Cake Paragraph 7(b)(15) . . . Seller And Eat It Too 1 clause may not be effective. In a recent case, the United States may assess and collect from U.S. Supreme Court to Consider Contractor, at Seller’s Major Issue for CERCLA Cost District Court for the Northern Recovery Scheme 3 District of Illinois affirmed a option, liquidated damages in bankruptcy court’s ruling that an an amount equal to Two Contractor Defamed During Thousand Five Hundred and Unionization Campaign May Be “optional” liquidated damages Entitled To 4 clause was unenforceable under No/100 Dollars ($2,500.00) Illinois law. Resource Tech. Corp. for each day after the Milestone Recent Developments Relating to Date that the Gas-to-Electric the City of Chicago Construction v. Congress Dev. Co., 2003 WL Contract Set-Aside Program 6 22057489 (N.D. Ill. Sept. 4, Plant fails to commence 2003) (Darrah, J.). commercial operation. Such Be “Mold” Sensitive 7 liquidated damages shall be Contractor Recovers Damages for In Resource Tech. Corp., the paid by Contractor on a weekly Utility’s Delay in Responding to owner of a landfill, Congress basis in arrears each Monday Requests for Information 8 Development Company after the Milestone Date until Recent Decision Confirms That (“Congress”), entered into a commercial operation has The Value Of “Additional Insured” contract with Resource occurred. If Seller assesses Coverage May Be Limited 10 Technology Corporation and collects from Contractor Update: Illinois Supreme Court Decides (“Resource”) for the construction such liquidated damages for One-Year Limitations Period Applies for and operation of a landfill gas any period of delay, such Injuries at Local Government Construction Sites 12 collection system. Due to liquidated damages shall be in

1 Construction News

full and complete settlement of [and] such clause was construed liquidated damages or for actual all claims, losses and damages as granting the option to sue for damages means that the “parties of Seller resulting from such actual damages and was did not agree in advance to the period of delay; provided, unenforceable.” Id. amount of damages that might however, that if the delay arise from a breach.” Id. at *5. If exceeds ninety (90) days, The district court upheld the this type of optional clause was Seller may also elect to bankruptcy court’s summary enforceable, it will allow a party to terminate this Agreement in judgment ruling. Id. at *6. The “have its cake and eat it too.” accordance with the provisions district court applied four criteria Id. (internal quotations omitted). of Paragraph 11 of this to determine if the liquidated The court also noted that while Agreement [which includes damages clause was valid and the Illinois Supreme Court has not default by the Contractor or enforceable. Id. at *3. The court addressed this specific issue, the default by Owner] and pursue held that in order for the Illinois Appellate Court addressed any of the rights and remedies liquidated damages provision to it in Catholic Charities of the provided for therein. Seller and be enforceable, (1) the parties Archdiocese of Chgo. v. Thorpe, Contractor acknowledge and must have agreed in advance to 318 Ill. App. 3d 304, 741 N.E.2d agree that the liquidated the amount of damages that 651 (1st Dist. 2000), and damages provided for therein might arise from the breach, invalidated an optional liquidated constitute a reasonable (2) the liquidated damages damages clause because the forecast of the actual damages amount must have been option showed that the parties Seller would sustain as a result reasonable at the time the never intended to establish a of such delay and are not contract was entered into, specific sum to constitute what intended as a penalty. Id. bearing some relation to the the damages would be in the (Emphasis added.) damages that might be incurred event of a breach. Id. in a breach, (3) the amount of Before the project was actual damages must be Companies in the construction completed, some of Resource’s uncertain and difficult to prove, industry should take heed of the creditors filed an involuntary and (4) the amount must be ruling in Resource Tech. Corp. petition for bankruptcy against specific and for a specific breach, and closely examine the language Resource. Id. at *2. After the not a threat to secure in their liquidated damages case was converted to a case performance or as a penalty to clauses to assess whether they under Chapter 11 of the punish a breach. Id. With these are unenforceable “optional” Bankruptcy Code, Resource filed four criteria in mind, the court clauses. „ a motion for partial summary construed the parties’ contract judgment on Congress’s claim for and affirmed the bankruptcy liquidated damages for delay. Id. court’s decision that the clause The bankruptcy court granted was an unenforceable penalty. Id. Resource’s motion, holding that at *6. the liquidated damages clause was an “optional liquidated The court reasoned that a damages clause that failed to liquidated damages provision that identify an alternative remedy . . . allows a party to either sue for

2 FALL 2004

U.S. Supreme Court to Consider Major Issue for CERCLA Cost Recovery Scheme

On January 9, 2004, the U.S. environmental agency, Aviall conducting remediation activities Supreme Court agreed to cleaned up contamination on its without first being required to do consider an issue under the property. Aviall tried to recover so, potentially disrupting federal Comprehensive its cleanup costs by suing the “voluntary” remediation programs Environmental Response, property’s former owner, Cooper, currently ongoing throughout the Compensation, and Liability Act under CERCLA Section 113. A country. Moreover, if the (“CERCLA” a/k/a Superfund) that divided Court of Appeals for the Supreme Court were to rule in could have a significant impact on Fifth Circuit ruled that a PRP, Cooper’s favor, other PRPs in remediation activities throughout such as Aviall, may sue to recover currently pending CERCLA the country. The Court will response costs even though Aviall actions would, like Aviall, lose consider whether a potentially had not first been subject to a their ability to recover remediation responsible party (“PRP”) under CERCLA civil action. Cooper, costs under federal law. In light CERCLA must first be subject to 312 F.3d 677, 686 (5th Cir. of the negative impact on state a CERCLA claim before it is 2002) (en banc). Cooper then and federal remediation permitted to bring a CERCLA asked the Supreme Court to programs, such a ruling by the Section 113 contribution claim to consider the question and the Supreme Court would likely recover remediation costs. Supreme Court asked the U.S. prompt calls for a legislative Section 113 provides that a claim Solicitor General to provide an response by Congress. „ for contribution may be brought opinion on whether the Court “during or following” a claim should consider this issue of brought under CERCLA Section statutory interpretation. 538 106 (an administrative order U.S. 976 (2003). The Solicitor brought by the USEPA) or under General urged the Court to 107 (a lawsuit brought by the reverse the appellate court as a USEPA or a private party to matter of statutory construction recover cleanup costs). and to protect the federal courts However, the last sentence of from the “substantial burden of Section 113 provides that resolving these complex cases.” “nothing [in Section 113] shall The Supreme Court granted diminish the right . . . to bring an Cooper’s and the Solicitor action for contribution in the General’s request for a review of absence of a civil action [under this issue. 124 S. Ct. 981 CERCLA].” These two (2004). The Supreme Court provisions seemingly contradict heard oral argument on October each other and have caused 6, 2004 but has not yet issued its confusion regarding when it is decision. permissible to bring a CERCLA contribution claim. If the Court rules that a party must be subject to a CERCLA In Cooper Industries, Inc. v. Aviall lawsuit before it can bring a Services, Inc., responding to CERCLA contribution claim, direction from the Texas many PRPs may cease

3 Construction News

Contractor Defamed During Unionization Campaign May Be Entitled To Punitive Damages

Unionization campaigns can be NOTICE TO THE PUBLIC required in a claim of defamation stressful for companies, unions LOWE EXCAVATING DOES per quod. and employees. Nevertheless, all NOT PAY THE parties need to be mindful of the PREVAILING On appeal, the Illinois Appellate serious legal consequences that WAGES AND ECONOMIC Court reversed the trial court’s dismissal of the defamation claim. can result from leveling unfair BENEFITS FOR Id. at 720-23, 765 N.E.2d at 30- accusations. A recent Illinois OPERATING ENGINEERS 32. Lowe argued that the Appellate Court opinion held that WHICH ARE presented at trial clearly punitive damages, including STANDARD IN THIS AREA OUR DISPUTE CONCERNS showed that: (1) the project was attorney’s fees, may be available federally funded; (2) Lowe was against a party spreading false ONLY SUBSTANDARD required by law to pay the information during a unionization prevailing wages on the project; WAGES AND BENEFITS PAID campaign. (3) the evidence at trial showed BY THIS that Lowe paid the prevailing COMPANY In Lowe Excavating Co. v. Int’l wages on the project; (4) Lowe’s Local 150 Union of Operating Engineers payroll on the project was International Union of Local 150, 327 Ill. App. 3d 711, certified and sent to the United Operating Engineers, AFL-CIO 765 N.E.2d 21 (2d Dist. 2002), States Department of Labor; and the court found that the (5) the Union knew that the International Union of Operating In February 1988, Lowe filed a project was federally funded and Engineers (the “Union”) defamed complaint seeking a temporary that Lowe’s payroll was certified. Lowe Excavating Co. (“Lowe”) by restraining order (“TRO”), The Appellate Court concluded picketing with signs that falsely preliminary and permanent that people within the industry stated that Lowe was not paying injunctions, and damages for knew that it was illegal for Lowe prevailing wages on a federally defamation. For the next eleven to work on a federally funded job funded project. The court also years, the parties fought without paying prevailing wages held that Lowe may be entitled to procedural battles that delayed and benefits. In light of this collect its attorney’s fees as trial until April 2000 – over twelve extrinsic fact, the Appellate Court punitive damages for the years after the picketing began. concluded that the Union’s defamatory statements. With respect to Lowe’s statement that Lowe did not pay defamation claim, the trial court prevailing wages and benefits The legal dispute decided in found that Lowe failed to prove by would be defamatory per quod if Lowe was slow-moving – it clear and convincing evidence false. Id. spanned more than 14 years. In that the Union’s statements 1987, the Union sought to concerning Lowe’s compensation The Appellate Court noted that unionize Lowe’s employees. In were false, or that the Union the evidence in the record early 1988, Union representatives made the statements knowing overwhelmingly suggested that decided to picket Lowe’s work at them to be false or with reckless Lowe did in fact pay the a federally funded project with disregard of whether the prevailing wages. Id. at 722, 765 signs stating: statements were true or false, as N.E.2d at 32. The trial court had

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heard testimony from three attorney’s fees may be included in with additional protection from different witnesses who testified the amount of the award of false statements because of the that the Union (1) knew that the punitive damages. E.J. McKernan Lowe court’s holding that punitive project was federally funded, Co. v. Gregory, 252 Ill. App. 3d damages may be recoverable on (2) knew that Lowe paid 514, 536, 629 N.E.2d 981, 992 defamation claims. However, the prevailing wages and (3) knew (2d Dist. 1993). Relying on Lowe case also is a sobering that Lowe’s payroll was certified. reminder that no victory comes Id. Conversely, the Appellate without a price – in this case, Court found that the only The Lowe decision more than 14 years of litigation evidence that supported a finding was required before Lowe that Lowe did not pay the may provide parties to achieved vindication. „ prevailing wage was the Union’s evidence that Lowe’s benefits unionization campaigns were not identical to the Union’s benefits and that Lowe’s wage with additional increase became effective 10 months after the Union’s. Id. The protection from false Appellate Court found that the statements because of evidence failed to demonstrate that Lowe did not pay prevailing the Lowe court’s holding wages as a whole, as required by federal law. Id. Therefore, the that punitive damages Appellate Court concluded that the trial court’s finding that Lowe may be recoverable on did not pay the prevailing wages was against the manifest weight defamation claims. of the evidence. Id.

The Appellate Court further held established precedent, the Court that Lowe may be entitled to found that the trial court abused recover punitive damages its discretion by excluding including its attorney’s fees. Id. at evidence of Lowe’s attorney’s 724-25, 765 N.E.2d at 33-34. fees in support of its punitive The Court held that though damages claim and instructed the punitive damages are “generally trial court to consider the disfavored because of their penal evidence if it decided to award nature, punitive damages may be punitive damages. Lowe awarded where, as here, the Excavating Co., 327 Ill. App. 3d defendant committed a with at 724, 765 N.E.2d at 34. actual malice.” Id. at 724, 765 N.E.2d at 34. In such The Lowe decision may provide circumstances, a plaintiff’s parties to unionization campaigns

5 Construction News

Recent Developments Relating to the City of Chicago Construction Contract Set-Aside Program

Almost 20 years ago, the City of discrimination and the States Supreme Court opinion in Chicago passed an ordinance to discrimination demonstrated to Gratz v. Bollinger, 539 U.S. 244 set aside a share of all City- now exist.” Builders’ Assoc. of (2003), and that the City’s funded contracts for minorities Greater Chicago, 298 F. Supp. program was therefore far too and women. The City touted the 2d at 742. However, Judge expansive and rigid to be program as a major step toward Moran did find that discrimination sustained under that standard. Id. ensuring equality in the exists in the areas of market competition for lucrative City- access and access to credit for In response to Judge Moran’s funded contracts. Under the City minority- or women-owned decision, the City has of Chicago’s program, 25 percent businesses in the construction implemented a new ordinance of City-funded contracts were industry. Id. at 740-41. He also that seeks to address the key allotted to minority-owned firms; found that the City “has a issues raised by the ruling. In the and another 5 percent to women- compelling interest in not having new ordinance, the City has owned companies. The its construction projects slip back introduced a program in which it ordinance defined a “Minority- to near monopoly domination by seeks to ensure continued Owned Business” as a “Local white male firms,” and gave the participation of minority- or Business” that was majority- City six months to “rethink the women-owned construction firms owned and controlled by a many tools of redress it has through new methods. Some of “Minority Group.” These Minority available.” Id. at 742. the key issues addressed in the Groups were defined as African- revised minority- or women- Americans, Hispanics and Asian- In his decision, Judge Moran owned business ordinance are Americans. The ordinance also found several flaws in the City’s setting a maximum personal net recognized a “Women-Owned program. He said the City was worth standard for applicants, Business” as a “Local Business” too generous in setting a ceiling adding graduation size standards majority-owned by women. on revenues for qualified under which a company companies — $27.5 million — that graduates from the program after But the City’s set-aside program allowed too many established achieving a certain level of for minority- or women-owned companies to qualify. Moran also revenue, and the creation of a businesses has been revamped said the City’s program was transitory program that will aid after a federal judge ruled late last deficient in that (1) it had set recently graduated firms in year that the program was illegal quotas, not goals; (2) was sustaining their business once because, among other things, it permanent; and (3) the City had they no longer qualify for the amounted to an unconstitutional not been flexible in granting minority- or women-owned quota system. Builders’ Assoc. waivers when a qualified minority- business program. Municipal of Greater Chicago v. City of or women-owned firm could not Code of Chicago, Section 2-92- Chicago, 298 F. Supp. 2d 725 be found. Id. at 739-41. In sum, 420 et seq. (N.D. Ill. 2003). Specifically, Judge Judge Moran found that the James Moran held that the City’s program failed because there was Although the full effect of that program “in its present guise no meaningful individualized revised program will not be cannot stand . . . because . . . the review of minority- or women- known for some time, one present program is [not] narrowly owned firms bidding for projects, interesting development is that tailored to remedy past as required by the recent United continued on page 9

6 FALL 2004

Be “Mold” Sensitive

Asbestos, lead, PCBs and with a building’s plumbing, buildings and allowing water to petroleum spills are common heating, ventilation or air enter the newly built or environmental problems of which conditioning system have refurbished structures, promoting real developers, property occurred. Indeed, moisture the growth of mold. See, e.g., owners, landlords and tenants are problems can arise almost Marshall v. Marvin H. Anderson keenly aware. The remediation anywhere, even in new Constr. Co., 283 Minn. 320, 167 and tort liabilities associated with construction where the emphasis N.W. 2d 724 (Minn. 1969); see these hazardous substances are on the design of “tight” buildings also J. Jay Young, Corey Tavel, & familiar to all who own, develop or may trap moisture and restrict the Chris Blackman, “Outside rent commercial and real estate flow of outside fresh air. Counsel Defending Against Mold- properties. Whenever an Related Personal Injury Actions,” environmental consultant The existence of mold, and in 227 N.Y. L. J. 4 (2002); “New performs an Environmental Site particular certain toxic molds like Lawsuit Drawing Fire from Assessment on a parcel of Stachybothys chartarum, has Builder,” 18 Las Vegas Bus. spawned a great amount of property, the buyer or financial Press 1 (2001); Tom Kertscher, litigation. Cases alleging claims institution requesting the ESA “Couple Sues Companies Over under theories including certainly expects that the Toxic Molds,” Milwaukee J. negligence, breach of contract, consultant will look for, and Sentinel, July 8, 2001, at 07F. breach of express and implied evaluate, the property’s potential These suits have been based on warranties, constructive eviction, exposure to these constituents. negligence and on a failure to professional malpractice, strict Another common hazardous meet building codes. In liability, negligent constituent now has been added Minnesota, a builder was found to , fraud, to this litany of substances to be have violated its duty of due care nuisance, workers’ compensation assessed and, if the ESA does when the basement of the home and violations of the Americans not include an evaluation of this the builder constructed became substance, the property with Disabilities Act have infested with mold as a result of purchaser or the lender must generated large settlements or flooding caused by poor request that it be evaluated. The jury awards for personal injuries construction. Marshall, 283 Minn. substance is mold. or property damage. at 324-25, 167 N.W. 2d 727. Within the last several years, mold Thousands of mold-related The builder was ordered to pay contamination and the property lawsuits are pending in state damages in the amount equal to damage and human health effects courts. See “Personal Business; the difference between the actual it allegedly has caused have Mold Can be an Insurance Mess value of the house with the mold grabbed the attention of the for Homeowners,” N.Y. Times, contamination versus what the media, the scientific community June 16, 2002, at Sec. 3, Page 9, value would have been if it had and the plaintiffs’ bar. Although Col. 2. Not surprisingly, builders been built correctly. Id. at 325- mold contamination is commonly are prime targets for property 29, 167 N.W. 2d 727-29. found in warm, moist climates, it damage and personal injury This growth in mold-related also can be found anywhere claims based on mold exposure. litigation has caused construction where condensation accumulates, Builders have been sued for water leaks, or where problems failure to properly construct continued on page 11

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Contractor Recovers Damages for Utility’s Delay in Responding to Requests for Information

Ordinarily, under the long a telephone company had a Plote’s claims, arguing that they established Moorman doctrine in statutory duty to provide certain were barred by the Moorman Illinois, parties to a construction information to a contractor and doctrine. The Circuit Court contract generally cannot sue in could be held liable for economic granted Illinois Bell’s motion to tort for economic damages damages caused by its breach of dismiss Plote’s claims. Id. caused by negligence and are that duty — even though the generally limited to a claim for phone company’s general On appeal, Plote argued that the breach of contract against those business was to provide phone Moorman doctrine did not bar its with whom they contracted. Tort service, not to provide such claim for delay damages that claims for economic damages information. Illinois Bell were caused by Illinois Bell’s caused by negligence are Telephone Company v. Plote, alleged failure to properly mark generally barred, absent certain Inc., 334 Ill. App. 3d 796, 799- the location of its underground recognized exceptions to 802, 778 N.E.2d 1203, 1206-08 facilities because the “Information Moorman. One such exception — (1st Dist. 2002). Provider Exception” to the the “Information Provider Moorman doctrine applied to Exception” — permits a tort claim In Plote, the Illinois Department of Plote’s claim under the against a defendant where the Transportation (IDOT) entered Underground Facilities Act. Id. at defendant is in the business of into a contract with Plote to make 799-802, 778 N.E.2d at 1206-07. supplying certain information for improvements to Arlington The Appellate Court agreed, the guidance of others in the Heights Road. Id. at 798, 778 holding that Section 10 of the business transaction, and is N.E.2d at 1205. Prior to Underground Facilities Act negligent in providing such accepting Plote’s bid for the imposed on Illinois Bell the duties information. See Moorman, 91 Ill. contract, IDOT submitted the of being an information provider, 2d 69, 86-89, 435 N.E.2d 443, construction plans to Illinois Bell even though Illinois Bell’s general 450-52 (1982); see also In Re Telephone Company (“Illinois business was to provide Illinois Bell Switching Station Bell”) so that Illinois Bell could telephone services and not Litigation, 161 Ill. 2d 233, 240- determine if the plans conflicted information. Id. at 801-02, 778 42, 641 N.E.2d 440, 443-44 with its underground telephone N.E.2d at 1207-08. The (1994). This exception has facilities. Id. Plote alleged that Appellate Court held that the heretofore been very narrowly Illinois Bell either did not respond determination of whether Illinois construed. (For example, see the or did not respond appropriately Bell was an information provider Spring 2000 issue of to its construction plan, and should be made by looking to the Construction News, which caused delays in Plote’s context of the specific transaction addressed the application of this construction project. Id. Plote at issue, not Illinois Bell’s general exception to information provided alleged various claims against business. Id. Thus, in the by architects and engineers.) Illinois Bell, including claims for context of the project at issue, violation of the Underground Illinois Bell was an information In a ruling that may expand the Facilities Act, provider under the Underground scope of the “Information Provider negligence, violation of the Illinois Facilities Act. Id. Exception” to the Moorman Highway Code, and intentional doctrine, the First District interference with a contract. Id. The court was unpersuaded by Appellate Court recently held that Illinois Bell moved to dismiss Illinois Bell’s attempt to rely on

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Fireman’s Fund Insurance should have survived Illinois Bell’s City of Chicago Company v. SEC Donohue, Inc., motion to dismiss. Id. Construction Contract 176 Ill. 2d 160, 679 N.E.2d 1197 Set-Aside Program (1997). In Fireman’s Fund, the Although Plote’s claim under the Continued from page 6 Illinois Supreme Court held that Underground Facilities Act was the “Information Provider not barred by the Moorman the City’s revamping of its Exception” did not apply to doctrine, the court ruled that program already has caused other service providers who distribute Plote’s other claims were barred. governmental bodies to information as part of their The court held that outside of the re-evaluate their programs. services and whose information is statutory duty imposed by the In 2000, Cook County’s program incidental to a tangible product. Underground Facilities Act, Illinois was held unconstitutional by a Id. at 168-69, 679 N.E2d at Bell had no common law duty to federal court because it did not 1209. The Plote court ruled that “mark the location of its facilities gather the necessary evidence to Fireman’s Fund was in order to avoid causing Plote show that discrimination existed. distinguishable from this case economic losses.” Id. at 804-05, Based on the City’s example of because Illinois Bell’s duty was 778 N.E.2d 1210. Therefore, developing a new program, one defined by the Underground Plote’s claim for common law Cook County commissioner is Facilities Act and not by a negligence failed because it did seeking to revive the County’s contractual relationship with not establish any duty on the part contract set-aside program after a Plote. Plote, 334 Ill. App. 3d at of Illinois Bell. Id. Similarly, Plote recent study revealed that only 803, 778 N.E.2d at 1209. failed to adequately state a valid 8 percent of County construction Further, the court found that the claim under the Illinois Highway work is awarded to minority- or policies of the economic loss rule Code and failed to state a claim women-owned firms since the were not applicable because for intentional interference with a County’s 40 percent goal was “Plote was not seeking the ruled illegal four years ago. The benefit of its bargain via a tort suit contract. Id. at 805, 778 N.E.2d falloff was considerable given that rather than through more at 1211. the County always met or appropriate contract remedies.” This case shows that the exceeded its 40 percent goal Id. The court also held that the Moorman doctrine’s development prior to 2000. We will update you tangible product prong of the can be influenced by seeming on any developments with the Fireman’s Fund analysis did not City’s program or the County’s apply because Illinois Bell’s unrelated areas of the law, such look at its program. „ information was not incorporated as the duty to provide information into a tangible product; its under the Underground Facilities information was merely to be Act. One lesson that can be used to avoid damage to Illinois drawn from the Plote decision is Bell’s facilities. Id. Thus, the the importance of identifying Fireman’s Fund case was whether you may have a duty to inapplicable, and Plote’s claim for supply information on a specific economic loss damages allegedly project that could subject you to caused by Illinois Bell’s violation tort damages for a negligent of the Underground Facilities Act misrepresentation. „

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Recent Decision Confirms That The Value Of “Additional Insured” Coverage May Be Limited

As we discussed in our Winter The question faced by the court Michael Marciano (“Marciano”) 2003 issue of Construction in American Country Ins. Co. v. worked for Spectrum Stone News, it is a common practice for James McHugh Constr. Co., 344 (“Spectrum”), a subcontractor on owners to require general Ill. App. 3d 960, 801 N.E.2d a project where James McHugh contractors, and for general 1031 (1st Dist. 2003) was Construction Company contractors to require whether the owner or general (“McHugh”) was the general subcontractors, to add them to contractor had coverage upon the contractor. After being injured on their comprehensive general the job, Marciano filed a tort claim liability insurance policy (“CGL”) against McHugh which alleged as “additional insureds.” The direct negligence by McHugh. owner and general contractor ...it is very important There were no allegations seeking attempt to thereby shift the cost to hold McHugh liable for any of defense and indemnification that owners and general negligence of Spectrum. At onto the subcontractor’s Spectrum’s request, American insurance policy rather than contractors review Country had listed McHugh as an invoke their own liability coverage. additional insured on Spectrum’s Recent Illinois Appellate Court the actual endorsement policy. However, the American decisions bring into doubt Country policy had the following whether this type of coverage language by which limitations: (1)coverage was exists under an additional insured they are named as limited to cases of imputed endorsement in many cases. liability for the actual omissions of Indeed, a recent Illinois Appellate additional insureds. the named insured, (2)coverage Court opinion reinforces the view for bodily injury caused by the that additional insured additional insured was specifically endorsements may be of limited excluded, and (3)the additional value. insured was required to tender tender of the defense of the claim tort claims to any other available The recent case concerns one of to the subcontractor’s insurance insurance carrier. the more common events that carriers as an additional insured. puts additional insured coverage In James McHugh Constr. Co., After a dispute between McHugh into play: when an employee of a the Appellate Court answered and American Country regarding subcontractor is injured on the that question in the negative. The whether McHugh was required to job site. In that situation, the Appellate Court provided a trigger coverage under its own injured employee generally will be comprehensive review of Illinois liability policy, American Country covered by the workers’ cases and concluded that there filed a declaratory judgment compensation system and will not was no coverage for a general action seeking a declaration that have a common law claim against contractor under an additional it owed no duty to defend or its employer. Thus, the employee insured endorsement because the indemnify McHugh because often will allege a claim against tort claim filed by the Marciano’s complaint alleged only the owner and general contractor subcontractor’s employee did not direct negligence by McHugh. for negligence. allege “imputed” negligence. Id. The Circuit Court granted

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Be “Mold” Sensitive American Country’s motion for Kraemer Brothers, Inc., 298 Ill. Continued from page 7 summary judgment, holding that App. 3d 805, 699 N.E.2d 1056 American Country had no duty to (1998); American Country Ins. and mortgage lenders to become defend or indemnify McHugh. Co. v. Cline, 309 Ill. App. 3d increasingly diligent on the 501, 722 N.E.2d 755 (1999); possibilities of mold infestation. The Illinois Appellate Court National Union Fire Ins. Co. of You should be aware that more affirmed the Circuit Court’s ruling Pittsburgh v. R. Olsen Constr. and more lending institutions are holding that because “the Contractors Inc., 329 Ill. App. 3d insisting that an Environmental Marciano complaint alleged only 228, 769 N.E.2d 977 (2002). Site Assessment be performed direct negligence against The Court held that “in each of on both commercial and McHugh . . . it does not trigger a those cases, the court interpreted residential property, and on both duty to defend.” James McHugh additional insured endorsements old and new construction, and Constr. Co., 344 Ill. App. 3d at similar to that in the present case that the assessment include a 971, 801 N.E.2d at 1040. The under nearly identical facts and thorough evaluation of possible Appellate Court held that “such excluded coverage for additional mold contamination. „ allegations, we think, take the insureds by way of summary Marciano complaint outside the judgment.” Id. protection of American’s endorsement to Spectrum and As we stated in our prior article on place it squarely within the this topic, which covered many of coverage exclusion that makes the cases cited by the McHugh American’s policy inapplicable to court, it is very important that allegations of ‘bodily injury’ or owners and general contractors ‘property damage arising out of review the actual endorsement any act or omission of the language by which they are additional insured(s) or any of named as additional insureds. If their employees.’” Id. at 972, 801 they consider the additional N.E.2d at 1040. The Appellate insured coverage significant to the Court then cited to the recent overall contractual arrangement of holdings of other panels of the the project, they should separately Illinois Appellate Court which negotiate the terms of the suggest that an additional insured endorsement to make the endorsement such as American coverage broad enough to include had with Spectrum does not liability arising as a result of their obligate the insurer to defend an alleged negligence. Moreover, additional insured under the facts even when an owner or general in McHugh. Id., citing Village of contractor believes that it has Hoffman Estates v. Cincinnati broad additional insured coverage, Ins. Co., 283 Ill. App. 3d 1011, it should ensure that its own CGL 670 N.E.2d 874 (1996); policy provides sufficient coverage American Country Ins. Co. v. for any eventuality. „

11 Construction News FALL 2004

Update: Illinois Supreme Court Decides One-Year Limitations Period Applies for Injuries at Local Government Construction Sites

In the Winter 2002 and Winter decided. See Hager v. II in One Hager and Paszkowski panels of 2003 issues of Construction Contractors, Inc., 342 Ill. App. 3d the Appellate Court were wrong. News, we discussed the 1082, 797 N.E.2d 167 (1st Dist. The ground for the Illinois Supreme sometimes confusing 2003), citing Paszkowski v. Court’s decision was its overriding jurisprudence regarding the Metropolitan Water Reclamation concern that the legislature determination of which statute of Dist. of Greater Chgo., 338 Ill. intended for Section 8-101 to limitations applies in certain App. 3d 781, 789 N.E.2d 342 (1st “apply broadly to any possible construction disputes. Dist. 2003). In finding that Greb claim against a local governmental Specifically, our Winter 2002 issue was wrongly decided, the Hager entity and its employees” (emphasis discussed the decision in Greb v. court relied heavily on the in original) and, therefore, Section Forest Preserve Dist., 323 Ill. App. Paszkowski decision and held 8-101 trumps Section 13-214. In 3d 461, 752 N.E.2d 519 (1st Dist. that, because the legislature light of the Paszkowski decision, 2001), which held that when a included the term “any body any tort claim against a local person is injured due to politic” in Section 13-214, that governmental entity or its negligence at a local government’s section was more specific than employees arising out of an injury at construction site, the one-year Section 8-101 as applied to a local government construction limitations period governing tort negligence claims arising at a local site must be filed within the one- claims brought against local government construction site. Id. year limitations period contained in governments (745 ILCS 10/8- at 1088-89, 797 N.E.2d at 172. Section 8-101 instead of the four- 101) (“Section 8-101”) applies year limitations period contained in rather than the four-year statute of The Illinois Supreme Court Section 13-214. limitation for tort claims arising out accepted an appeal of the of construction projects (735 ILCS Paszkowski case, and on The Illinois Supreme Court’s 5/13-214(a) (“Section 13-214”)). November 18, 2004, reversed the decision can be found at Appellate Court. The Illinois www.state.il.us/court/Opinions/ Recently, two panels of the same Supreme Court found that the SupremeCourt/2004/November/ court found that Greb was wrongly Greb panel got it right and the Opinions/Html/96220.htm. „

The following Construction Law Practice attorneys contributed to this edition of Construction News:

Joseph G. Bisceglia James A. Vroman Thomas P. Monroe Anthony C. Porcelli Terence G. Banich II Kendra D. Newman Gabrielle Sigel Gregory M. Boyle Ryan S. Stippich

For further information or to request copies of this newsletter please contact: Joseph G. Bisceglia Chair: Jenner & Block Construction Law Practice Editor: Construction News [email protected] 312 923-2784

©2004 Jenner & Block LLP. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended to provide legal advice but to provide information on legal matters and Firm news of interest to our clients and colleagues. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. Under professional rules, this publication may be considered advertising material; the attorney responsible for this publication is Joseph G. Bisceglia. image from the Collection of the Supreme Court of the United States.

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