Structural failures and other jobsite disasters can lead to financial and legal problems — as well as damage to the contractor’s reputation.
On many construction projects, there is a risk of a worker being injured or a structural failure while the job is in progress. But for most contractors, those scenarios are more of what-if situations than things they routinely prepare for.
Nonetheless, unexpected tragedies happen, such as the well-reported March 15 pedestrian bridge collapse at Florida International University in Miami. The investigation of the incident that left six people dead and several injured is on going, and it’s likely that the contractors and designers involved in the project well be impacted by legal, insurance, bonding and financial issues for years to come.
The potential legal threats for a contractor after a structural failure or major accident on a project are multifold, and some of them hinge on what the contractor’s agreements are with the owner, designers and subcontractors.
When contractors enter into a traditional design-bid-build contract, they are typically presented with a set of project documents — blueprints and specifications — and are expected to execute on that design. In the event of a failure, said Quinn Murphy, commercial and construction attorney with Sandberg Phoenix in St. Louis, if the contractor can prove the project was built according to the plans and specifications, then the company might avoid liability if design error is determined to be the cause of the incident.
This legal principle, said Alan Packer partner at Newmeyer & Dillion in California, is called the Spearin Doctrine, which typically relives contractors of the responsibility for design errors as long as they follow the exact specifications provided them.
But the doctrine might not help a contractor that is part of a design-build or other collaborative team in which it has input into design elements.
“If the delivery method is design-bid-build, and there’s some kind of failure, the owner will be looking at the contractors and subcontractors and [separately] at the designer,” said Judah Lifschitz, principal and co-president at Shapiro Lifschitz & Schram, a Washington, D.C.-based law firm. “If [the contract is] design-build … it’s the owner against the team, and that team will be suing each other.”
In the event of deaths or injuries, personal injury and wrongful death lawsuits will be aimed at not only the principal players but at smaller project participants as well. “When injuries are severe,” Packer said, “and those people need a remedy, attorneys try to cast a wide net.”
Contractors’ liability also can increase, he said, if it can be proven that company supervisors or other site personnel should have recognized the defect that caused the failure and did nothing. Lifschitz added there are multiple parties — subcontractors, sub-subcontractors, inspection companies just to name a few — that will end up being forced to mount legal defenses.
Criminal charges and financial liabilities
Criminal charges also are possible, for example, in the case of a contractor that ignores safety warnings. But Parker said: “It takes a lot to get there.”
The Manhattan District Attorney’s office has been particularly aggressive pursuing criminal charges against contractors that violate safety regulations. It was the case of 22-year-old Carlos Moncayo, who died in a trench collapse, that spurred Manhattan District Attorney Cyrus R. Vance Jr. to form a construction fraud task force to investigate safety, fraud and corruption in the city’s construction industry.
In Moncayo’s case, the general contractor for the project was found guilty of manslaughter, and Moncayo’s direct employer pleaded guilty to the same charge. One foreman was sentenced to prison time. Prosecutors alleged that supervisors were told that the trench Moncayo died in needed shoring up but that those pleas were ignored.
And then, of course, there would likely be legal action by the owner over the loss of whatever structure was being built.
After a major jobsite incident, it’s a given that legal bills are going to be high. In a case that lasts years, they could add up to millions. The companies being sued might retain engineers, forensic experts and the like, and that’s not cheap either.
What can tighten those financial screws even more, Lifschitz said, is if the owner has stopped payment pending the outcome of the investigation. Until the contractor’s insurance company makes a determination how or if it will cover the event, the contractor must come out of pocket to pay for not only bills related to the investigation but for subcontractor, material and other bills for the project or risk even more stress — and legal bills — if vendors start filing claims for nonpayment. “They have enough battles,” he said.
Insurance and bonding issues
Commercial insurance, depending on the terms of coverage, can pay for a significant chunk of claims and legal expenses following a jobsite catastrophe, but there are always financial limits as to how much policies pay out.
After a major claim or claims, there is the possibility that renewing or applying for new insurance coverage could pose a challenge said, said Graham Mills, also a partner at Newmeyer & Dillion, as the insurance company evaluates the risk and potential for future losses.
The same goes for obtaining performance and payment bonds, which are usually required for government-funded projects. One of the reasons bonding would be more difficult is if covering legal and other expenses post-failure has siphoned cash off the balance sheet.
“Bonds are not insurance,” Packer said. “Bonds are the extension of credit and [a company] needs resources on the balance sheet.” If the contractor is found liable for the accident, then that could also play into the bonding company’s decision to do future business with that company. In addition, the contractor still has to make good on any claims the bonding company pays, and there is typically a personal guarantee that one or more officers must sign as well.
At the very least Mills, said, a contractor who has had a major claim against a bond might have to start the bonding process for future projects a little sooner than usual in order to allow time for the bonding company to process the application.
Customer and employee worries
When a contractor goes through a catastrophic failure, it’s not just that job that could be affected. Owners of jobs in progress, about to get underway or in the bid process could get skittish and decide to terminate the relationship.
Many construction contracts, Packer said, are written in a way that allows the owner to terminate the relationship for convenience, meaning for any reason. In that scenario, he said, the contractor would be capped at a reduced scope of work and sent on its way with final payment.
But, according to Lifschitz, current work isn’t what contractors in these situations need to worry about.
“Where they’re going to have their problem,” he said, “is getting new work.” The name recognition that contractor has could be forever linked with the failed project. And while there could be concerns about the quality of future work, the issue, Lifschitz said, would be more about the contractor’s potentially precarious financial position. Will they be able to stay in business and function? “The more owners who take that position,” he said, “the worse it gets.”
Employees could also start asking questions about the future of the company, leading them to look for work elsewhere. “People start getting worried and scared, Lifschitz said, when company execs are in crisis mode and trying to keep it all together.
So, can a contractor that is involved in a disastrous structural failure ever recover fully?
“I think the answer to that is in who is ultimately found liable,” Murphy said. If the design team is found to be at fault, he said, then there’s no reason to think the contractor can’t bounce back, at least financially. From a reputation standpoint is another question. “If your [business] is painted as the company involved with that project,” he added, ‘that’s a more difficult hurdle to get across.”