A Contractor Will Not be Indemnified by its Insurer for Knowingly Installing Flooring on a Concrete Slab with a Moisture Content Exceeding Specifications

Managing a construction project from the beginning to end is a bit like orchestrating a symphony. The numerous parties involved in a construction project all play different and specific roles, all working under the project manager’s lead. Accordingly, construction project managers act as conductors, issuing directions to the “musicians,”—the parties involved—such as instructions to the construction superintendent and crew, requests for information to the engineer, turning in submittals to the architect, and letting a subcontractor know when and where they can start their work, all to make sure each party is playing their part correctly and at the appropriate times. The faced paced role of construction management, especially project managers managing multiple construction projects at a time, means that construction project managers face numerous decisions on a daily basis, all of which can have monetary benefits or consequences, or injurious results. Thus, the decision making of the project manager is of critical importance to the smooth execution of a construction project. A successful project manager knows the job up and down: the construction plans, the job and material specifications, the schedule, where the bid allocates time and money for manpower and materials for each stage of the construction process, the different subcontractors and suppliers involved, the planned logistics for completing the job, and the potential spots where problems are likely to arise, just to name a few things. There will likely be times when the project manager is confronted with a question of which there is no clear-cut answer, but the project manager must provide an answer, and must do so relying on their knowledge and experience.

            However, there are also times when a project manager make decisions fully knowing the consequences, or potential consequences, of his or her actions. The rationale for making the decision could be a myriad of reasons, such as to mitigate a loss on the job, or conversely to enlarge profit, or to keep the construction schedule on track. Whatever the basis, the repercussions for making a decision while fully understanding the consequences or potential consequences can be worse than making a decision fully unaware of any consequences or potential consequences.

            Making decisions, of which the consequences can range from insignificant to very costly, is part of the risk-analysis responsibility of project managers. However, a project manager’s role in risk-management is only one line of defense to liability on construction projects. Another common line of defense to protect against exposure to loss, employed in almost every construction project, is the protection of insurance. Without delving into the complexities of insurance coverage or the myriad of options against liability and loss insurance can provide, there is generally one common topic of insurance that is commonly disputed: the event or circumstances that may or may not trigger insurance coverage.

            Generally, insurance policies require an “occurrence” for coverage under the policy to be triggered. Commonly, insurance policies, as well as the law, define an “occurrence” as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Additionally, courts ordinarily define the term “accident” as unintended and unexpected happenings that occur without intention or design on the part of the insured. While these definitions offer guidance as to when insurance policies are provide coverage to their insureds, the issue of what constitutes an “occurrence” is very commonly litigated (or at least a declaratory judgment is sought) due to the many specific and unique circumstances that often arise in construction projects.

            The case of Navigators Specialty Insurance Company v. Moorfield Construction, Inc.¹ interlaces the two themes discussed above: the day-to-day decision making of construction project managers and the role of risk-management, particularly insurance. In Moorefield, a general contractor was sued by an owner several years after the completed construction of a shopping center based on claims the flooring had failed. The general contractor was covered under a commercial general liability (CGL) insurance policy throughout and after construction of the shopping center. After the insurer was notified of the lawsuit against the general contractor, the insurer filed suit seeking a declaration it had no duty under the CGL policy to defend or indemnify the general contractor in the lawsuit. The trial court found the vinyl composition tile (VCT) and carpet tiles at issue failed due to excessive concrete slab moisture from the original construction and concluded there was no covered “occurrence” under the CGL policy. Thus, the trial court ruled the insurer had no duty to defend or indemnify the general contractor because the general contractor’s liability arose from a non-covered claim.

            On appeal, the general contractor argued its act of directing the flooring subcontract to install VCT and carpet tile was an “occurrence” under the CGL policy because the flooring damage was caused by vapor emission from the concrete slab over a period of years. In this case, coverage under the CGL policy would be triggered by an “occurrence” as defined above. Neither the general contractor nor the insurer disputed the general contractor acted deliberately in directing the flooring subcontractor to install the VCT and carpet tiles on the concrete slab. Accordingly, because the general contractor, as the insured, performed a deliberate act, there was no “accident” under California law unless some additional, unexpected, independent, and unforeseen happening occurred that produced the damage.

            That was not the case here, as nothing else happened that might have caused the flooring to fail. The VCT and carpet failed due to excessive moisture from the original construction. In the words of the appellate court:

 

“Excess moisture in the concrete slab, creating high levels of moisture vapor emission, was not an additional, unexpected, independent, or unforeseen event. [The general contractor] knew of the moisture emission test results and knew those results exceeded specifications. The excess moisture was not independent of [the general contractor’s] intentional act but was the topic of discussion before the decision was made to install the flooring. [The flooring subcontractor] anticipated problems due to high moisture and would not install the flooring unless [the general contractor] released it from warranty claims.”²

 

            The trial court had found the general contractor elected to proceed with installation knowing the moisture content exceeded design specifications and knowing the installer required a waiver to perform the installation. The general contractor’s project manager took a risk when he decided to have the flooring installed immediately so the shopping center could open in October, rather than wait for the concrete slab to evaporate more of its moisture content. The appellate court ruled the deliberate decision by the general contractor’s project manager made with knowledge that the moisture vapor emission rate from the concrete slab exceeded specifications was not accident because the damage was not produced by an additional, unexpected, independent, and unforeseen happening. Because the appellate court ruled the flooring failure was not a covered occurrence, the insurer had not duty indemnify the general contractor, leaving the general contractor to bear the full costs of its mishap, less defense costs.³ 

            I chose to write about this case for several important reasons. First, because this case exemplifies superbly the gravity of the consequences that can result from the types of decisions project managers face on a daily basis. Second, this case exhibits some of the different types of risk management found in construction projects, such as decision making of the project manager, the role of insurance, and product warranties. My third reason for writing about this case is because I have personally experienced the exact dilemma this project manager faced. The following details my experience.

            The project consisted of a new elevated corridor that would attach to the side of an existing manufacturing plant in order to connect to another, existing elevated corridor. My company was involved as a prime contractor on the project, working for a construction manager. Our scope of work consisted of the interior buildout (flooring, walls, and ceilings) of the elevated corridor, while a different contractor was responsible for the base build (foundation work, structural steel frame, elevated concrete slab, and shell). As with most construction projects, time was of the essence and thus the project was fast-track construction. As the project manager, my team and I immediately began our scopes of work as soon as we were able to begin. When it came time to lay the specified electrostatic dissipative (ESD) flooring tile, our subcontractor performed a standard calcium chloride test to measure the amount of moisture in the concrete slab. Approximately three days later the results came back revealing the moisture content of the concrete slab exceeded the ESD flooring manufacturer’s maximum moisture vapor emission rate (MVER) threshold. This came as no surprise once it was realized the concrete slab was poured only about two weeks prior, a fact that prior to the MVER results went unnoticed by the parties involved. Since it was a Friday, it was agreed to bring in some heaters and fans to try and draw out some of the moisture over the weekend (because there was some float in the schedule to try this out, although we all had our doubts it would work). The following Monday another calcium chloride test was performed. The results came back the same. Because the elevated corridor was enclosed and the only access to the construction work space led directly to the outdoors and it was summer, it was decided to test the concrete slab using a relative humidity test just in case the ambient temperature and humidity were affecting the results. Again, however, the relative humidity test results came back exceeding the ESD flooring manufacturer’s maximum MVER threshold. At this point the float in the schedule was exhausted, and as the project manager I was faced with the decision on how to procced. The flooring subcontractor refused to install the ESD tile unless the owner signed a release and waiver, and the superintendent for the construction manager was on my case to complete construction on schedule. It was discussed among the parties involved, based upon everyone’s experience, that the chances of the flooring failing (i.e. peeling up) due to excessive moisture was a very slim chance.

            However, because the concrete slab was only poured a few weeks before my company began our scopes of work on the project and because the concrete slab was not part of our contractual obligations, I held my ground and refused to proceed with the installation of the flooring unless the owner signed a release and waiver (while I also agreed to apply a moisture barrier coating at no cost as a preventative measure to prevent the floor from failing). It must be pointed out that owners are never happy to be asked to sign a release and waiver for brand new construction they are purchasing which they have yet to use. After several meetings with the owner and all associated parties, the owner signed the release and waiver, and construction proceeded accordingly.

            Similarly, in the case of Moorfield when confronted with the decision on whether to proceed or not, testimony revealed the project manager had also contemplated, based on his 40 years of experience, the margin of the flooring failing was unlikely. The general contractor’s project manager was not surprised by the results because moisture vapor emission rates exceeding specifications “happens all the time.”⁴ The project manager had been involved in other projects in which the MVER exceeded specifications. In each of those projects, the flooring was laid anyway and no problems ensued. The project manager believed there was “[l]ow risk to no risk” that flooring would fail if laid on a concrete slab with a MVER of seven to nine pounds, when the specification was five pounds.⁵ In such a situation the decision was “not difficult” for the project manager—“[i]t’s always lay the floor.”⁶ Testimony established the project manager had been involved in about 50 construction projects in which concrete slabs were tested for moisture vapor emission. Of those 50 projects, 49 had moisture vapor emission rates exceeding the required specifications. In each of those projects, the general contractor’s project manager laid the flooring and failure never occurred.

            While my experience was very similar to that of the project manager’s in the case of Moorfield, I would be ignorant to not recognize and point out some key differences between the situations. First and foremost, my company was engaged as a prime contractor by a construction manager, and thus were responsible only for our scopes of work and not responsible for the entire project as was our construction manager, and the general contractor in the case of Moorefield. Second, if my memory serves correct, the MVER of the concrete slab on our project was testing between 10 to 12 pounds, approximately more than twice the maximum allowed per the manufacturer’s specifications. Thus, my experience when compared with the situation in Moorfield is not an “apples to apples” comparison.

            The following are some takeaways from the circumstances described above:

For Attorneys:

• Observe the court’s differentiation between determining the insurer’s obligation to both defend and indemnify the general contractor in this instance, and why the court found the insurer had a duty to defend but not indemnify. Also consider the factual scenario and decision making process played out under the circumstances of this case, as it provides insight on where to navigate the deposition and/or examination of witnesses in cases of similar nature.

 

For Construction Managers:

• Note the common language of what constitutes an “occurrence” in the insurance policy in the case above, and know the language of what constitutes an “occurrence” in the insurance policies covering your projects, as well has how the jurisdictions where your projects are located define an “occurrence.” Also keep in mind the curing time for concrete and the proposed schedule for construction.

For Designers and Schedulers:

• Give forethought to the specified concrete mixture and the timeline of the construction schedule.

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