Caught in the middle again

This past week I talked to two different clients who were experiencing the same problem. They are both subcontractors who sell, but do not manufacture, products that are part of a building envelope, and both are now becoming nervous about their liability for mold claims. For one of them, the concern arose because of a lawsuit he was brought into. The suit was filed by firefighters who say they were

This past week I talked to two different clients who were experiencing the same problem. They are both subcontractors who sell, but do not manufacture, products that are part of a building envelope, and both are now becoming nervous about their liability for mold claims.

For one of them, the concern arose because of a lawsuit he was brought into. The suit was filed by firefighters who say they were exposed to fungus from leaks in construction of their station. They sued the builder who brought in its subcontractors. The subcontractor has insurance coverage ( because it was an old policy) but knows it won't be so lucky the next time since it can't get that coverage anymore.

The other client only realized he had a problem when he couldn't get paid. He didn't want to give his warranty until he was paid, and the owner wouldn't pay until the warranty was delivered. As a result of this impasse, they all learned for the first time that while his specific piece of paper containing his company warranty might not yet be effective, he was nevertheless on the hook for the warranty "incorporated by reference" in his subcontract. That boilerplate warranty clause was in fact much broader than his own language, and he is bound to honor it even if he hasn't been paid due to disputes about other issues.

If a subcontractor
is very careful, it can frequently
limit its liability.

Once again, the sub is caught in a liability trap: Under most state Uniform Commercial Codes and under the terms of the contracts it signs, it has liability for product defects. It further is asked to indemnify the customer if the customer is sued for something involving the sub's work, and by contract the sub is required to carry insurance to respond to such claims, but such insurance is often expensive, if it is available at all.

If the sub is very, very careful, it can frequently limit its liability through a combination of several practices: Avoid the types of work with the greatest risk. Many states do not allow vendors of products to avoid liability to "consumers," particularly for personal injury attributable to their products. Since personal injury jury verdicts can be huge and unpredictable, some firms choose to manage their risk by not working in this market. For

contractors, this means not only single-family work, but also multifamily apartment construction and condominiums.

While the risk is the greatest in structures where people live for extended periods of time, the issue can also exist with any "habitation" project, which would include nursing homes, schools, hotels and hospitals.

Avoid customers with unreasonable contract terms. Recently in Kansas City, a situation made headlines that no contractor would bid on a big excavation package for a new arena because the liability terms of the contract were so one-sided. The city's construction manager had no choice but to tone down the terms.

I have had general contractors ask me to redraft their indemnity and warranty clauses because they can't get subcontractors to sign them and they were losing low prices.

Even if you are not successful in getting the customer to back down, it may be better for you to take a pass on a contract if the circumstances make its terms unreasonable.

Come up with your own acceptable language. Manufacturers are way ahead of contractors in developing limited warranty and indemnity language and in refusing to sell under any other terms. Working with your attorney and risk managers, you may be able to find limited warranty language that gives enough of a warranty to satisfy a customer while allowing you to sleep nights. Rather than sign a contract that promises insurance coverage you know you won't have, show the customer what you can provide.

Offer extended coverage for an additional fee. If you can't afford the kind of insurance that is being required, chances are that the general contractor and owner are having the same problem. It may be that some additional coverage can be obtained, perhaps just for this one job through a special endorsement to your policies. Your insurance broker or agent may be able to give you a quote for the cost, which you can offer as an option in your bid. This allows you to disclose what your "standard" coverage will be and show that the customer had the option of buying more, which might come in handy if you end up in court.

None of these ideas is bulletproof. The only way to avoid risk entirely is to never take any risk at all and, for those in construction, risk-taking is part of life. What we are talking about here is risk management, and smart contractors and vendors who employ it are the ones who are still around after the more reckless of their competitors have folded.

TAGS: Law