Does the Responsible Developer/General Contractor and its subcontractors run the risk of not being insured in construction defect claims on public projects?
Yes, according to a new Washington Supreme Court case. How can that happen?
In can happen because, while no time may run against the King (public owner), time will absolutely run against the contractors when their insurance policies expire.
The new decision "WA State Major League Baseball Stadium Public Facilities District v. Huber, Hunt & Nichols-Kiewit", was actually part of an earlier decision from 2009. The earlier decision was that the statutes of limitation and repose did not bar the (public) owner's suit against the general contractor. The new decision is that the general contractor, provided it had well drafted contracts with pass through provisions, has no time bars between it and the implicated subcontractors.
So if a public owner sues a general contractor beyond the applicable statutes of limitation and repose, the general can in turn join subcontractors. That seems to be fair. Most claims made this far out will be completed operations claims for allegedly defective construction and resultant property damage. The general contractor and its subcontractors will all have incurred tens or hundreds of thousands of dollars in premiums to purchase commercial general liability insurance for the loss at issue. This insurance asset was purchased so the collective contractors would not have to pay these types of claims out of their own coffers.
This new decision is problematic in several ways. First, the owner's claim was more than 10 years from substantial completion. So if this was a private project the owner's claim would have likely been time barred. But the court ruled that based on ancient European laws involving doctrines like sovereign immunity, where "no time runs against the King" (along with "the King can do no wrong"). For public policy considerations, this "no time runs against the King" doctrine may be in the best interest of the tax payers. One also hopes that contractors who work on these public projects will now incorporate the cost of that future risk into their bids, knowing they could be sued more than 10 years after completion.
The second problem is that if the public owner does make a claim 10 years later, the general has to expect that many of its subcontractors would be defunct (bankrupt, victims of the recession, etc.). Tendering claims to defunct subcontractors may not get the general contractor any benefit, like money or services such as repairs of the defective construction. Well, if nothing else, the general contractor can at least rely on the benefits of their own insurance and their subcontractors' insurance, right?
Maybe not, and this is the third problem. Even if the public owner's contractor is viable, and or the key subcontractors are also viable, there is another cold hard fact: after 10 years there may be no insurance money available for anyone because those policies EXPIRED! If the claim is large and there is no insurance, even a general contractor may become insolvent, and that does not help tax payers.
Many insurance policies contain expiration dates. Here's they key language from one CCIP (commercial contractors insurance policy) that insures a national commercial general contractor doing public works projects here in Seattle:
Products-Completed Operations Hazard includes all bodily Injury and Property Damage occurring or discovered away from premises you own or rent within 10 years or the time period required by the contract, whichever is less.
Another popular OCIP insurer's policy contains this language:
The expiration of this policy period for the "products-completed operation hazard" is determined by applicable law or statute to a maximum extended policy period of ten (10) years.
So imagine you are the responsible contractor, you spend money on the best insurance you can buy, insure all of your subs, and a public owner sues you 11 years after substantial completion. You tender to your insurer, but your insurer does not have to pay a dime, because your policy expired!
For future public projects in Washington, the responsible general contractor would want to purchase policies without expiration dates. If the insurance market does not sell such a product, perhaps public contractors should take this issue up with the Legislature and the Office of the Insurance Commissioner. It seems wholly inequitable for the courts to rule that are no statutory time bars to public owners' claims against their contractors, but then allow the insurance industry to sell policies with time bars for any claims made after 10 years. Especially so when these contractors purchased those policies as the primary asset to protect them from the risks of those future claims.