The tornadoes that tragically ravaged the southern U.S. recently underscore the reality that natural disasters can strike at any moment. Ongoing construction projects are particularly vulnerable to natural disasters and catastrophic weather events. Owners of construction projects and their contractors should have an effective disaster recovery plan in place that contemplates legal and insurance issues related to extreme or catastrophic weather events.
INSURANCE ISSUES
When drafting recovery plans, project owners and contractors have numerous insurance-related questions to consider including whether the project owner has coverage for flood damage, for example through the National Flood Insurance Program, and/or for windstorm damage. Project owners and contractors should review all property, casualty, builders risk, and other policies and determine the availability and scope of insurance coverage; identify the causes of all potentially covered property damage, for example whether damage was caused by wind-driven rain, wind, storm surge, a breakdown of flood protection systems, and/or flooding from rain; and identify issues that may affect a policyholder’s ability to collect on a claim. The policyholder will likely need to review how the policies define key terms such as “flood” and “wind” to determine whether the policy language is broad enough to cover potential property damage caused by these elements.
Other considerations should include whether builders risk policies are in place that will cover natural disasters; whether policies cover any expected business interruption losses caused by delays, or “contingent” business interruption losses, which are losses suffered because a supplier or subcontractor was delayed; and, if a disaster occurs, how project participants will collect and preserve materials necessary to substantiate claims.
In addition, companies should be prepared to determine, after a catastrophic weather event, whether it is necessary to engage a forensic accountant or other consultant—the cost of whose services may be covered in a policy—because specific specialized information may be needed to develop a claim for business interruption or other types of loss. Project participants must also know how to comply with notice requirements of the relevant policies—which is generally a mandatory condition precedent to a claim—and provide timely notice to all carriers whose policies potentially provide coverage.
CONTRACT CONCERNS
Project participants should also understand their contractual rights and obligations in the event of a severe weather event including, for example, those related to increases to costs of work, termination, delays, and claim submission requirements.
Delays and Increased Costs: Delays caused by severe weather events are treated in many construction contracts as “excusable delays,” i.e., the contractor is entitled to additional time to complete the work but not additional compensation. Delays are generally compensable only if they would not have occurred but for the action or inaction of the owner, or where the delays arose as a result of a condition that the owner was originally responsible for, such as differing site conditions. However, some contracts do contain provisions expressly addressing extreme or catastrophic weather events, so project participants should carefully review the particular terms of the agreement. Project participants should also analyze the terms of the contract to determine the contractors’ entitlement to increased costs arising from natural disasters such as the costs of cleanup, correcting and/or replacing damaged work, and increases in the cost of construction materials, and determine whether further insurance coverage is necessary to protect against the risk of incurring such costs.
Claim submission requirements: Most construction contracts require the submission of claims and notice of claims within mandatory established time periods. Because many jurisdictions strictly enforce such provisions, it is critical that project participants strictly comply with the procedure for asserting claims and all associated notice requirements. Parties should also ensure that claim notices are properly submitted to sureties, if applicable.
Termination: Whether a contractor is contractually entitled to terminate a contract is complicated and depends on the particular terms of the agreement. Even if a project has become significantly delayed, the contractor may be responsible for a substantial increase in costs. If it appears unlikely that the project is able to achieve completion due to a natural disaster, the contractor should not assume that it is contractually entitled to or advisable to terminate. If a contractor is considering termination, they should exercise the utmost care and caution because terminating a contract regularly leads to disputes.
CLOSING THOUGHT
Project owners and contractors must carefully review their construction contracts in preparation for an extreme weather event and understand their rights and responsibilities, so they are best equipped to get the project back on track if a natural disaster were to occur.
For more information
Daniel A. Kapner, Esq. (www.slslaw.com/daniel-a-kapner) is a member of Shapiro, Lifschitz & Schram’s trial practice, construction law, and power and energy construction groups, where he advises local, regional, and national clients in various sectors of the construction industry on contract and commercial disputes, mechanics lien claims, construction defect claims, design errors and omissions, real estate and property disputes, and contract drafting. Contact him at 202.689.1900 or kapner@slslaw.com.
Modern Contractor Solutions, May 2020
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