Newsletter Spring 2019, Issue No. 61

In This Issue stipulate any forum other than ORS 701.640 May Not Void Forum- the home state of Selection and Choice-of-Law the project or Jacob Zahniser……………………………… 1 contractually apply any law other than What is the “Occurrence” in a CGL Policy the law of the Emily Miller ………………...... … 2 home state of the project. Oregon Law – Traps for the Unwary ORS 701.640 Bill Fig …………………………...... …... 4 states as follows:

Avoiding Coverage Confusion in Design Jacob Zahniser Professional Terms Justin Monahan ….....………………………. 5 1) A construction contract may not include any provision, covenant or clause that: ORS 701.640 MAY NOT VOID FORUM- (a) Makes the construction SELECTION AND CHOICE-OF-LAW Jacob Zahniser contract subject to the of Miller Nash Graham & Dunn LLP another state or that requires any litigation, or other proceeding Do not underestimate forum-selection and choice- arising from the construction of-law clauses when coupled with an arbitration contract to be conducted in another provision; ORS 701.640 may not apply and your state. client may find itself arbitrating claims far from the project under unfamiliar and unfriendly law.

A forum selection clause is one that stipulates the in which to bring the claim. This could ch 47.025; 815 Ill. Comp. Stat. Ann. 665/10; Ind. be the state of the project or the home state of one Code § 32-28-3-17; Kan. Stat. Ann. § 16-121(d); of the parties, typically the upstream party. La. Rev. Stat. Ann. § 92779(B)(1); Minn. Stat. § Related, a choice-of-law clause specifies which 337.10(1); Mont. Code Ann. § 28-2-2116(1); Neb. state’s law will govern the dispute. Again, this Rev. Stat. § 45-1209; Nev. Rev. Stat. Ann. § could be the state of the project or the home state 108.2453(2); N.M. Stat. Ann. § 57-28A-1; N.Y. of one of the parties, typically the upstream party. Gen. Bus. Law § 757; N.C. Gen. Stat. Ann. § 22B- These clauses are very common in construction 2; Ohio Rev. Code Ann. § 4113.62(D); Okla. Stat. and receive little attention; for Ann. tit. 15, § 15-821; Pa. Stat. Ann. tit. 73 § 514; construction projects in Oregon, and many other R.I. Gen. Laws § 6-34.1-1(a); S.C. Code Ann. § states,1 it is against public policy to contractually 15-7-120.A; Tenn. Code Ann § 66-11-208(a); Utah Code Ann. § 13-8-3.2; Va. Code Ann. § 1 See Conn. Gen. Stat. § 42-158m; Fla. Stat. Ann. 8.01-262.1; Wis. Stat. Ann. § 779.135(2). 1 Thus, the Oregon construction reviewing a ORS 701.640 to void a forum-selection or choice- subcontract for an Oregon project could shrug his of-law clause in a construction contract subject to or her shoulders when coming across a forum- arbitration. selection or choice-of-law clause; under The importance of these types of clauses as a ORS 701.640 such a clause would be dispute resolution lever should not be unenforceable, right? Not so fast. underestimated. Putting aside the perceived “home Most construction contracts also contain an field advantage,” a forum-selection clause can arbitration provision. There is mounting authority require a party to litigate far from its place of holding the Federal Arbitration Act (“FAA”) business and far from the location of the project preempts otherwise applicable state home- while simultaneously allowing the other party to like ORS 701.640 where the arbitration litigate close to home. If the stipulated location is a provision stipulates forum and governing law. great distance from the project it may be difficult Consequently, ORS 701.640 may not apply to void (and certainly more expensive) to marshal arbitration in a foreign jurisdiction under foreign witnesses and to the distant forum. law. Further, the travelling party will need to hire unfamiliar local , but the party litigating in Section 2 of the FAA mandates arbitration its “home field” will be able to use its own provisions in contracts “shall be valid, irrevocable, familiar counsel. While forum non conveniens and enforceable, save upon such grounds as exist grounds may persuade the arbitrator to move the at law or in for the revocation of any arbitration to the project’s home state, do not rely contract.”2 This “is a congressional declaration of on ORS 701.640 to do so. a liberal federal policy favoring arbitration Contact Jacob at [email protected] agreements, notwithstanding any state substantive or (503) 205-2352. or procedural policies to the contrary.”3 While litigants can argue the contract is not subject to the preempts state law that restricts venue for FAA, given the substantial nexus a construction arbitration to the project's home state) (citing OPE project has to interstate commerce, that argument Int'l LP v. Chet Morrison Contractors, 258 F3d is likely to fail especially where one of the parties 443 (5th Cir. Tex. 2001) (holding same with is domiciled out of state (hence the forum- 4 regard to similar Louisiana ), KKW selection clause in the first place). And, there is a Enterprises, Inc. v. Gloria Jean's Gourmet Coffees mounting litany of lower court decisions holding Franchising Corp., 184 F.3d 42 (1st Cir.1999) the FAA preempts a state’s construction-specific (holding same with regard to similar Rhode Island home-court statute as applied to an enforceable 5 statute involving franchise agreements); Bradley v. arbitration provision. In short, do not rely on Harris Research, Inc., 275 F3d 884 (9th Cir.2001) (same)); M.A. Mortenson/Meyne Co. v. Edward E. 2 9 U.S.C. § 2. Gillen Co., 2003 WL 23024511, * 4 (D. Minn. 3 Moses H. Cone Mem'l Hosp. v. Mercury 2003)(acknowledging preemption: "state laws, Construction Corp., 460 US 1, 24 (1983) which attempt to 'rewrite the parties' agreements (emphasis added). and compel arbitration of their dispute in a forum 4 See Allied-Bruce Terminix Cos. v. Dobson, 513 which is not one of those enumerated in an US 265, 278 (1995) (adopting a “commerce in arbitration agreement's forum-selection clause,' are fact” analysis to whether the subject matter of the presumably preempted by the FAA) (citing cases); contract involves interstate commerce). Gem Mechanical Services, Inc. v. DV II, LLC, 5 See, e.g., R.A. Bright Construction, Inc. v. Weis 2012 WL 4094476 (D.R.I. 2012) (holding FAA Builders, Inc., 930 NE2d 565 (Ill. App. Ct. 3d preempts statute voiding contract clause requiring Dist. 2010) (holding Section 2 of the FAA arbitration in another state).

Construction Law Newsletter ▪ Spring 2019, Issue No. 61 2

as much trouble as ‘accident’ and ‘accidental.’” Botts v. Hartford Acc. & Indem. Co., WHAT IS THE “OCCURRENCE” IN A CGL POLICY 284 Or 95 (1978). “The problem arises from an Emily Miller erroneous impression that there is one all- Miller Nies LLC encompassing definition of ‘accident’ or ‘accidental’ * * *.” Id. at 102; accord Chale v. The standard Allstate Life Ins. Co., 353 F3d 742, 746 (9th Cir Commercial General 2003) (“Notably, the Oregon Supreme Court has Liability (“CGL”) acknowledged the futility of such an undertaking,” policy covers, among i.e., trying to formulate such a “universally other things, accepted definition”); St. Paul Fire & Marine Ins. because of Co., Inc. v. McCormick & Baxter Creosoting Co., damage caused by an 324 Or 184, 204 (1996) (finding the dictionary “occurrence.” So, what definition “broad enough to cover the proposed then is the definitions of both sides”). Ambiguous policy “occurrence?” Is it the language is uniformly construed in favor of defective work? Is it coverage for the insured under Hoffman Constr. Co. v. Fred S. James & Co., 313 Or 464, 469-72 the building’s Emily Miller (1992). exposure to conditions caused by defective work? Is it the accident of In appropriate cases, Oregon courts have focused unintended property damage? on the unintended result, finding that the

“occurrence” is the accidental injury or damage. The significance of this inquiry cannot be See, e.g., N. Clackamas School Dist. No. 12 v. overstated. Not only is the “occurrence” necessary Oregon School Brds. Assoc. Prop. & Cas. Trust, to trigger the insuring agreement, but CGL policy 164 Or App 339, 345 (1999) (“[W]e and the limits customarily apply per each “occurrence.” Supreme Court have recently reaffirmed that, in Moreover, deductibles and self-insured retentions the insurance context, the meaning and often apply per each “occurrence.” Endorsements determination of ‘accident’ focuses not on sometimes attempt to limit coverage to a single conduct, but on result.”). policy period by addressing continuing and progressive property damage “arising from the Alternatively, in the context of ongoing exposures same ‘occurrence.’” Excess insurers sometimes causing damage over a period of time, courts argue multiple occurrences to attempt exhaustion applying Oregon law have held that the exposure of the primary policy’s aggregate limit before the is the “occurrence.” See California Ins. Co. v. excess policy is triggered. In these scenarios and Stimson Lumber Co., No. Civ. 01-514-HA, 2005 more, how the “occurrence” is articulated can be WL 627624, at *7 (D Or March 17, 2005) key. (holding that the repeated exposure to building

materials constituted one “occurrence”); see also The standard CGL policy defines the term Interstate Fire & Cas. Co. v. Archdiocese of “occurrence” as “an accident, including Portland in Oregon, 35 F3d 1325, 1329-30 (9th continuous or repeated exposure to substantially Cir 1994) (holding that the ongoing exposure to the same general harmful conditions.” If you think the subject priest constituted the “occurrence”). this definition is as clear as mud, you are not alone. Oregon courts find this definition Outside of the statutory auto insurance context, inherently ambiguous, as well. “There are Oregon courts have not focused on the cause of probably not many words which have caused

Construction Law Newsletter ▪ Spring 2019, Issue No. 61 3 the injury or damage, but what that tells us is that parties, including any mortgagee, the material focusing on the cause does not favor the insured in supplier’s lien will have priority over the most cases. If it did, insureds would be well- mortgagee’s existing encumbrance as to the positioned under Hoffman to prevail on that improvement and the “land that may be required interpretation, as well. for the convenient use and occupation of the improvement constructed on the site.” ORS Ultimately, the inherent ambiguity of the 87.015(1). This is commonly referred to as “super “occurrence” definition makes it susceptible to priority.” varying applications, depending on the facts of a particular case and which result favors coverage However, for the savvy mortgagee, there is for the insured. another card to play - ORS 87.025(4). This statute provides: Contact Emily at [email protected] or (971) 255-1407 x1 A mortgagee who has received notice of delivery of materials or supplies in accordance with the provisions of subsection (3) of this OREGON LIEN LAW – TRAPS FOR THE UNWARY section, may demand a list of those Bill Fig materials or supplies including a Sussman Shank LLP statement of the amount due by reason of delivery thereof. The list Every construction practitioner is (or should) at of materials or supplies shall be least be generally aware of the technical, statutory delivered to the mortgagee within quagmire that is 15 days, not including Saturdays, Oregon construction Sundays and other holidays as lien law, ORS Chapter defined in ORS 187.010, of receipt 87.001, et. seq. of demand, as evidenced by a Known to most are the receipt or a receipt of delivery of a requirements and registered or certified letter deadlines for lien containing the demand. Failure to notices, the recording furnish the list or the amount due of a lien, and the by the person giving notice of foreclosing of a lien delivery of the materials or supplies that must be followed Bill Fig shall constitute a waiver of the in order to preserve a preference provided in subsections claimant’s right to perfect and enforce a (1) and (2) of this section. construction lien. However, mired in the bowels of (Emphasis added). the Oregon lien law statutes are several less obvious traps for the unwary practitioner. With construction , the importance of priority over existing encumbrances cannot be overstated. The first such trap may be sprung early on in the A lien that has super priority, i.e. priority over a life of a project, well before counsel is involved, mortgagee’s (i.e. banks/lenders) of Trust, and it has serious consequences to material provides serious leverage to the lien claimant, suppliers. Generally speaking, on new which generally results in the mortgagee paying construction, if a material supplier sends out a the lien claimant. In most cases, the mortgagee, proper and timely pre-lien notice to the appropriate after performing some early , will

Construction Law Newsletter ▪ Spring 2019, Issue No. 61 4 pay off a superior lien to avoid the lien claimant ORS 87.060 shall be allowed to any party failing foreclosing its lien (and being awarded its attorney to comply with the provisions of this section.” fees for doing so) and extinguishing the (Emphasis added). While this statute does not mortgagee’s inferior interest. A mortgagee’s early affect the priority of a lien, it does affect a very payment to a claimant with a superior lien claim is important right of a construction lien claimant – simply good business because it minimizes the the right to recover attorney fees incurred in mortgagee’s loss and preserves its encumbrance. foreclosing the lien. After priority, the threat of A lien claimant’s failure to comply with attorney fees is the lien claimant’s second biggest ORS 87.025(4) results in a loss of the lien’s super leverage point in getting its lien paid. This is priority and, consequently, the lien is inferior to especially true regarding a lien for a smaller the mortgagee’s pre-existing interest. As a result, amount where the owner/mortgagee knows it is the mortgagee’s secured interest in the property is not cost effective for the claimant to foreclose the no longer threatened by the lien; the lien claimant lien absent the ability to recovery attorney fees. At loses most, if not all, of its leverage vis a vis the the point a notice of intent to foreclose is sent, a mortgagee; and the mortgagee generally will not claimant may be so frustrated with the project that satisfy the lien. Thus, it is important for counsel it ignores or “round files” correspondence from who represent parties that supply materials to a other parties. However, it is important to counsel a construction project to ensure their clients are lien claimant that it needs to continue to carefully aware of, and comply with, ORS 87.025(4). review any project-related correspondence and Likewise, counsel to mortgagees should advise timely comply with an ORS 87.057 request. their clients of the potential benefit of making such a request. Contact Bill at [email protected] or (503) 227-1111. A second trap lies in the language of ORS 87.057. Subsection (2) of that statute provides:

Where a notice of intent to AVOIDING COVERAGE CONFUSION IN DESIGN foreclose a lien has been given as PROFESSIONAL CONTRACT TERMS provided by subsection (1) of this Justin Monahan section, the sender of the notice Otak, Inc. upon demand of the owner shall furnish to the owner within five Often the design firm’s days after the demand a list of the professional liability materials and supplies with the insurance policy is its charge therefor, or a statement of a greatest, maybe sole, contractual basis for the owner’s asset to pay to clients obligation, for which a claim will with valid claims. In be made in the suit to foreclose. turn, a lot of clients, from (Emphasis added). private landowners through public entities, The kicker is in ORS 87.057(3), which requires a “plaintiff or cross-complainant seeking to Justin Monahan are familiar with hiring foreclose a lien in a suit to foreclose shall plead construction contractors and prove compliance with subsections (1) and (2) to perform work, but may be less familiar with of this section. No costs, disbursements or hiring and to provide attorney fees otherwise allowable as provided by professional services. These clients often base their contracts with design firms off of their latest

Construction Law Newsletter ▪ Spring 2019, Issue No. 61 5 construction contract. When they do so, however, of its subconsultants “as if the professional they use terms we see all the time that can give the services had been performed by the prime itself.” designer’s insurance company some arguments This created concerns for both the prime’s and the about distancing themselves from coverage. This subconsultant’s insurance security. As to the is not in anyone’s best interest. prime, it raised the question whether it amounted to a contractual agreement extending the prime’s While there are many different types of contract liability beyond its standard of care. As to the clauses, one central concept is that the professional subconsultant, it raised a question whether there liability policy applies to the professional service was other primary insurance coverage through the – the work of the discipline itself. This means that prime that moved the subconsultant’s insurance the design professional cannot name other project coverage into the back seat, potentially leaving the participants who are not practicing the discipline subconsultant in a gap with both insurers making of architecture, or , or whatever it may hay of the overly ambitious provision. be, as “additional insureds” on their professional liability policies. Coming from the construction This brings up another central concept: that the side, clients are used to being named “additional design professional policies to insure damages for insureds,” and keeping a chain of “additional deviations from the “standard of care.” As the insured” endorsements going down through the rules governing architects describes it, “In contracting ranks. While design professionals can practicing architecture, an shall act with still name clients and others as “additional reasonable care and competence, and shall apply insureds” on their own CGL and other policies, the technical knowledge and skill which is applied contract language which purports to give access to by architects of good standing, practicing in the the professional liability policy other than through same locality.” OAR 806-020-0030(1). practice of the covered discipline creates confusion. It is an old red flag for contract negotiators to see “warranties” for design professional services, like One example provision purports to give the you would see in the construction context. But we property owner unilateral control over any continue to see property owners make efforts to and resolution of third-party claims brought land everywhere else around this target in efforts against both the property owner and design to bolster the design professional’s obligations professional jointly. This creates confusion for a under a contract. These include a “warranty” that few different reasons. First, it creates confusion the design services will be provided within the regarding the professional liability insurer’s standard of care; a “warranty” that if the project is control over the defense and resolution of an constructed in accord with the design documents it insured claim. Second, it creates confusion will perform as intended; a “warranty” that the regarding whether the property owner is trying to design will comply with all laws (however broad insert itself into the policy directly, giving the that is); a “warranty” that the design professional insurance company a platform to argue the design has read and understands the performance professional has contractually agreed to something requirements of the contract and will design to that has altered the insurer’s obligations, and meet these requirements, etc. therefore, muddying the waters of defense and coverage for what otherwise could have been a The property owner’s intent is no mystery. straightforward claim. “Warranty” is a strong word to pump up the design professional’s obligations so there are more Another example provision purports to make the promises to point to if there are problems later. prime design professional responsible for the acts Inadvertently, however, property owners are also

Construction Law Newsletter ▪ Spring 2019, Issue No. 61 6 providing more promises for the design Construction Section Committee professional’s insurance company to point to, valid or not, to create uncertainty about insurance Tyler Storti, Chair, [email protected] coverage for a claim which might otherwise have Dan Duyck, Past Chair, [email protected] been a simple fit into the design professionals’ Doug Gallagher, Past Co-Chair, Nominating insurance. Committee Chair, [email protected] Tom Ped, Past Co-Chair, [email protected] A lot of times in the negotiation of these types of William Fig, Chair Elect, [email protected] provisions, counsel may assume a zero-sum Curtis Welch, Secretary, [email protected] posture, that the design professional is pushing Jakob Lutkavage-Dvorscak, Treasurer, back on these broader provisions in order to [email protected] reduce its liability. Often, however, that is not the case. Sophisticated counsel can coordinate to Members at Large make sure the design professional’s greatest asset, Sandra Fraser, [email protected] its professional liability policy, can do its job and C. Andrew Gibson, [email protected] help clients in need, without undue confusion. Ryan Hunt, [email protected] Tara Johnson, [email protected] Contact Justin at [email protected] Jakob Lutkavage-Dvorscak, [email protected] or (503) 287-6825 Stacey Martinson, [email protected] Justin Monahan, [email protected] Steven Norman, [email protected] Michael Peterkin, [email protected] Jeremy Vermilyea, [email protected] Molly Washington, [email protected] Van White III, [email protected] Jacob Zahniser, [email protected] Emily Miller, [email protected] Jim Chaney, [email protected]

Advisory Members Jason Alexander, [email protected] D. Gary Christensen, [email protected] Katie Jo Johnson, [email protected] Darien Loiselle, [email protected] Chuck Schrader, [email protected] Pete Viteznik, [email protected]

Newsletter Editor Justin Monahan, [email protected]

Find prior Section Newsletters at www.osbarconstruction.com

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