SOUTH DAKOTA SUPREME COURT UPDATE: Bad Faith, Bad Facts, or Bad Arguments?

Bad faith, buried argumentsSometimes lawyers and contractors can be tempted to complain that an engineer, judge, or arbitrator just didn’t “get it.” If that is the problem, maybe we should ask, why not?

A contractor’s case gets buried.

The South Dakota Supreme Court recently tossed out a lawsuit against an engineer brought by a contractor who was seeking reimbursement of $104,000 in liquidated damages and payment of over $1.1 million in damages.

In Domson v. KLJ, a Wyoming contractor alleged that engineering errors had significantly delayed road construction work in the Pine Ridge Reservation. Among other problems, the contractor cited testimony indicating that (1) the engineer failed to disclose that work could not start until an artifact study was completed, and (2) plan errors required extra work adjusting the grade at one end of the project.

This testimony suggesting at least two serious errors and omissions may have been lost on a majority of the South Dakota Supreme Court, which decided that the entire lawsuit should be dismissed without a jury trial. While a majority of the court agreed with the overall outcome, the justices’ vote count tells a more nuanced story.

Three arguments convince one justice of one thing.

First, the contractor argued that, as a matter of court-imposed public policy, contracts should not be allowed to shield engineers from liability for project decisions made in good faith. The contractor lost this argument by a unanimous 4-0 decision of the court, which devoted six pages to rejecting this argument. The court best explained its decision in the following quote, citing precedent spanning from 1889 to 2013:

The power of courts to declare a contract void for being in contravention of sound public policy, is a very delicate and undefined power; and, like the power to declare a statute unconstitutional, should be exercised only in cases free from doubt.

The four justices agreed unanimously that only in the most exceptional cases should any court exercise its powers to rewrite a contract. Their decision makes sense—contracts can only be effective as business tools if we expect their clear terms to be enforced for better or for worse. This decision was bad for one contractor, but not for the contracting industry as a whole.

Second, the contractor argued that a jury should be allowed to decide whether the engineer had acted in bad faith. However, instead of offering the court any evidence of bad faith, the contractor argued that, because the engineers “performed below acceptable standards, their actions necessarily lacked good faith.” Based on that record, the same four justices decided against making a jury spend time hearing evidence and deliberating about facts that would not change the outcome of the case as a matter of law. Holding that negligence does not automatically rise to the level of “bad faith” is also not bad for the contracting industry, because contractors get sued too.

Only on the third issue did the contractor make some headway, convincing a single justice that there was enough evidence for a jury to hear evidence about whether the alleged design errors and omissions mentioned above were actionable professional negligence. Unfortunately for the contractor (and for the contracting industry), a 3-1 loss on this issue was hardly a consolation prize.

From the ashes of one contractor’s defeat on this issue, one helpful rule for the contracting industry did arise: the South Dakota Supreme Court took the opportunity to affirm that engineers owe a duty to contractors to “reasonably draft and interpret… project specifications.” If an engineer fails to meet professional standards in this respect, an injured contractor may be entitled to damages.

The case against “creative” arguments.

The two clear allegations of engineering errors and omissions mentioned above were nowhere to be found in the majority opinion. Instead, the majority opinion was bogged down with arguments about public policy and bad faith, which the court unanimously shut down. Perhaps the court would have had a better opportunity to consider the only winnable argument if it hadn’t been buried by the contractor’s onslaught of creative arguments.

The South Dakota Supreme Court’s decision in Domson demonstrates that achieving the right outcome in construction disputes is not just about having more documents and more arguments, but can be more effectively focused on finding the right documents and the right arguments.


Service. Honesty. Reliability.


© 2018 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Minnesota: Mechanic’s Liens in the Gopher State

We’ve all heard the old adage: Plan your work and work your plan. When it comes to securing payment for construction work using mechanic’s liens, this definitely holds true.

In response to enthusiastic feedback about our recent lien article, we are expanding on the topic to highlight state-specific requirements. The first of Welle Law’s four practice states we will cover is our home state of Minnesota.

For any contractor who works on private property in the Gopher State, the strict requirements of Minnesota’s mechanic’s lien law should be part of your payment strategy.

Bare Necessities of a Minnesota Mechanic’s Lien

Two things are required to be entitled to a lien in Minnesota:

      • First, your work must contribute to the improvement of private real estate. In Minnesota, “improvement” is broadly defined as any contribution of “labor, skill, material, or machinery for any purpose specified, which includes the alteration of any building.” Minnesota’s mechanic’s lien law recognizes broad categories of covered improvements, including engineering, surveying, clearing and grubbing, repairing or removing structures, excavation, utilities, grading, paving, and landscaping, to list a few.
      • Second, you must be eligible to make a claim under the statute. This includes anybody that contributes to the improvement “by performing labor, or furnishing skill, material or machinery.” In Minnesota, contractors who fail to obtain necessary licenses may not be eligible for a mechanic’s lien.

The Devil’s in the Deadlines

Missing one deadline will in most cases remove this powerful tool from your collection toolbox. Three deadlines must be met in order to have a valid lien in Minnesota:

Pre-Lien NoticeRecordingEnforce in Court
10 days after agreement120 days after completionOne year after completion

Pre-lien Notice

If you contract directly with the property owner, you must insert pre-lien notice directly into the written contract, if any. If there is no written contract, give pre-lien notice to the owner by personal delivery or certified mail within 10 days of agreeing upon the work.

For subcontractors and material suppliers, give pre-lien notice to the property owner no later than 45 days after you start work.

Even though there are rare exceptions to pre-lien notice requirements, there is no reason not to play it safe and do this whenever you work on private property in Minnesota.

Conveniently, Minnesota’s mechanic’s lien statute provides the exact language to be used in all pre-lien notices, which can be found here.


Under Minnesota’s mechanic’s lien law, you must record a lien statement with the recorder of deeds for the county where the improvement is located within 120 days after your last date of work.

The lien statement has to meet several requirements listed in the statute.

You also need to give a copy of the lien statement to the property owner by either personal service or certified mail.

Enforce in Court

Think about how quickly the last year passed. This is the window to enforce a lien through direct negotiations. Long before the one-year anniversary of your work, consult a construction attorney (if you haven’t already!) about bringing a foreclosure action. A notice of lis pendens (“litigation pending”) has to be filed with the county recorder. And as a final resort, you can pursue payment by obtaining a judgment and foreclosing on the property.

Work Your Plan

The best way to work your plan is to keep it simple. One basic approach is to simply follow a collection schedule for every project where you improve private property in Minnesota, starting on the last date of work:

0 DAYSDocument your last date of work. Invoice as soon as possible.
60 DAYSContact your customer to check on payment. Let them know your policy is to file a lien if you’re not paid within 90 days.
90 DAYSContact the property owner as a courtesy to let them know that a lien will be filed if you are not paid immediately.
120 DAYSDO NOT MISS THE DEADLINE! Preparing the legal descriptions and invoices necessary to file the lien can take time, so start this process early and find help if needed no later than the 90-day mark.
11 MONTHSIf you have not consulted a construction law attorney about bringing a foreclosure action, this is the time.

Mechanic’s liens are a tried and tested remedy to secure payment when your work improves private property. Of course, they’re only successful if you have—and work—a good plan. Stay tuned for future articles highlighting liens in Iowa, North Dakota, and South Dakota.


Service. Integrity. Quality.


© 2018 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Price Escalation Clauses

Turn the tables on tariffs and other market disruptions

Price escalation clauses

The recent announcement of aluminum and steel tariffs is the latest wild card in the high-stakes game of pricing construction work.

Over the last decade, we have experienced significant spikes in costs of diesel, asphalt, cement, gypsum, lumber, PVC, and steel. Shifting international demand, production anomalies, and other market forces can sometimes predict the occurrence, but not necessarily the magnitude or timing, of these market shifts.

With the yet-to-be-determined impact of tariffs on the immediate horizon, both owners and contractors should consider the benefits of price escalation clauses.

How Does “Price Escalation” Work?

Price escalation clauses allow periodic adjustments to a contract price when we expect a market disruption but cannot predict when or by how much.

Price escalation clauses can be tailored for a particular current event (e.g., tariffs or conflicts in the Middle East) that converge with a particular project’s needs (e.g., large quantities of steel, fuel, or asphalt). To address each situation, these clauses can dictate:

    • The types of commodities that are covered
    • How to calculate a baseline price
    • How to calculate price adjustments
    • Bid items to be adjusted
    • A minimum threshold to trigger an adjustment
    • A maximum cap allowed for an adjustment
    • Mark-ups for overhead and profit (typically not allowed)
    • Notice requirements
    • Whether and how to adjust prices downward
    • Intervals between adjustments
    • Owner’s audit rights
    • Documentation requirements
    • Expiration (e.g., reinstating original bid prices if original or extended completion date not met)
    • Time extensions for impacted delivery schedules


Nothing is Free

No owner is excited to pay higher prices and accept time extensions. Why not simply force contractors to bear all the risks?

The simple answer is that nothing is free.

As long as construction remains a for-profit industry, owners should expect to pay for what they get. Owners can either have a plan to do this in a controlled, fair, and stabilizing way, or roll the dice and likely pay a premium for the extra risk.

On private contracts, the choices for the owner are ripe for negotiation. And even on public contracts, some owners have realized the benefit of including price escalation clauses. For several years, the Minnesota Department of Transportation has included a fuel escalation clause in its standard template for all state-let projects. Contracting officers on federal projects can include a standardized clause to cover price escalation.

Playing the Hand You’re Dealt

Nearly 40 years ago, the Federal Highway Administration encouraged public owners to consider the benefits of using price escalation clauses. Nevertheless, these clauses are underutilized in public works specifications.

So, what if adding price escalation to your contract is no longer an option? Options on immediate projects are limited, but a few short- and long-term options may be considered:

    • Raise the issue in pre-bid question and answer forums
    • Look down the supply chain for exposure to escalating prices
    • Seek early material purchases and alternative sources
    • Propose value engineering
    • Examine contracts for change-of-law change orders
    • Price any risk that cannot be passed along either up or down the supply chain
    • Offer early services of specialty contractors and suppliers to support design and budgeting of future projects
    • Pursue better contracts for future projects through trade associations


The biggest barrier to using more price escalation clauses is persuading owners that these are good for their budgets. But once owners are enrolled, the tools are readily available. AGC of America provides a sample price escalation clause that can be customized for individual projects. AGC also publishes a monthly summary of producer price indexes, which is one of many tools available to calculate price adjustments.

All bets are off as to when or how the repercussions of the current tariff situation will play out. However, when a major disruption is expected, and the odds of varying outcomes are difficult to measure, having a price escalation clause may be an ace in the hole for owners and contractors alike.


Service. Integrity. Quality.


© 2018 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

What is Your Lien Strategy?

Time is money

You’re about to start work for a privately-owned project. You have negotiated the best possible contract terms, studied the plans, and are ready to send your best people to the job. All that remains is to perform quality work and submit the necessary paperwork, right?

Only if you have a plan in place to protect your lien rights.

Liens are your best tool for securing payment for work performed on private property. Unlike many of the legal issues contractors face, implementing a lien strategy is relatively simple. However, it is all too easy to fall into the common trap of waiting for a problem to appear before addressing this critical item on your project checklist.

Meeting the Threshold

Statutory liens (such as construction or mechanic’s liens) serve the same purpose on private projects as payment bonds serve on public projects—to allow those who provide labor or materials used to improve real property to secure their right to payment.

You generally need two things in order to make a lien claim:

First, there needs to be an improvement to private property. State statutes typically define what would be considered an improvement, but the main thrust is that your work must have contributed to the real property or any permanent fixtures, whether your work involved architecture, engineering, construction, landscaping, repairs, or maintenance.

Second, you need to be eligible to make a claim under the state statute where the improvement is located. The types of eligible persons vary from state to state, but most states allow any individual or company to claim a lien if they:

  • furnished skill, labor, and/or material;
  • were under a contract with the owner or its agent, contractor, or subcontractor; and
  • improved the building, land, or structure in question.

Don’t Be Late!

Assuming you and your project both meet the threshold requirements, the strategy for securing a lien is all about timing. This chart summarizes the types of deadlines in four states that should be embedded into your systems to ensure that they are strictly followed on every eligible project in each state:

 Pre-lien / NoticeFiling DeadlineEnforce in Court
Minnesota Required 120 daysOne year
IowaRequired90 daysTwo years
North DakotaRequired90 daysThree years
South DakotaRequired120 daysSix years

Pre-lien / Notice 

Before starting your work on a new project, your lien strategy should minimally include giving notice to the right people at the right times. In Minnesota, for example, subcontractors on many projects must serve “pre-lien” notice when they start work. Other states’ notice requirements are tied to later events, but nonetheless lie on the critical path to the next deadline.

Filing Deadline

The clock for this deadline starts the day you complete your last item of work, which everyone responsible for collecting payment should be tracking. Meeting this deadline requires careful planning to ensure work is documented and invoiced in time to allow payment to arrive. Your plan should also spare enough time to prepare a lien and record it with the deed for the property before the deadline if normal processes won’t secure payment.

Enforce in Court 

Finally, the deadline to enforce a lien in court serves double duty as your deadline to secure payment through negotiation without filing a lawsuit. Different events can trigger the start of this period in each state. For example, this period might start following the expiration of the previous deadline, or on the date the last item of work was completed. You should also be prepared for this period to be accelerated significantly. The property owner can demand that you take action, leaving you with only a few weeks to either start a lien foreclosure lawsuit or forfeit the lien.

Keep It Simple: Embrace Strict Enforcement

With few exceptions, courts will strictly enforce lien statutes. Just last year in Snider v. Brinkman, the North Dakota Supreme Court rejected a contractor’s attempt to file a second lien after the contractor lost its first lien for failing to file all the necessary documents with the county recorder. The lesson from Snider is simple: failure to strictly adhere to all the requirements in the lien statute can strip an otherwise savvy contractor of its best tool to secure payment.

There is nothing to fear as long as your project checklist includes a well-informed lien strategy. Although requirements vary from state to state, creating one strategy for each state and implementing it on every eligible project will pay off the first time an owner or higher-tier contractor unexpectedly cannot—or will not—pay its bills.

Service. Integrity. Quality.


© 2018 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Hidden Duty, Real Responsibilities: Good Faith and Fair Dealing

As written, most construction contracts leave lots of space for interpretation. These ambiguous or gray areas are often what lead to contract disputes. Parties involved in the design, bid, and build process may naturally assume the most favorable version of terms, and it can be tempting to take advantage of the contract’s lack of clarity.

However, when taking advantage crosses the line into abusing another party, it can violate the implied duty of good faith and fair dealing. Good faith and fair dealing obligates each party in a contract to act with fairness and common sense, which at a minimum means not interfering with another party’s ability to perform.

This duty lurks quietly within every contract, but can result in real consequences. Two 2017 decisions by the Court of Federal Claims demonstrate how the government’s breach of good faith and fair dealing caused two projects to veer off course, forcing the contractors to rely on the courts to hold the government accountable for its breach.

NASA Gets Grounded

In Horn & Associates v. United States, NASA tasked an audit recovery contractor with finding overpayments by NASA that were eligible for reimbursement. NASA agreed to compensate the contractor with a portion of the funds recovered. The contractor identified hundreds of claims worth hundreds of millions of dollars.

Throughout the project, NASA employees exhibited apathy and indifference toward the contractor’s efforts, hindering its ability to complete the audits. For example, NASA personnel:

  • Provided incomplete data;
  • Erroneously denied claims;
  • Created confusion by giving inconsistent directions;
  • Failed to collect overpayments;
  • Refused to schedule meetings;
  • Displayed unwillingness to deal with the contractor’s personnel; and
  • Responded to emerging issues by attempting to suspend the contract.

These factors had a damaging and material impact on the contractor’s ability to perform, running counter to “reasonable expectations” of cooperation. Consequently, the court found that NASA had breached its duty of good faith and fair dealing under the contract.

USACE Burns Bridges

In MW Builders, Inc. v. United States, the U.S. Army Corps of Engineers failed to secure easements needed to connect permanent power to the project site, something that should have happened before bidding. To make matters worse, the Army Corps then misled and kept the contractor out of the loop during key negotiations with the power company, creating confusion about who would sign a line extension agreement needed before construction could proceed.

The court ordered the government to pay the contractor for breach of contract, because the government’s games had cost the contractor significant time and money. Specifically, by interfering with, hindering, and failing to cooperate with the contractor, the government violated its duty of good faith and fair dealing.

Our Mission: The Space Between

The implied duty of good faith and fair dealing functions as a common-sense “gap-filler” in contracts. Courts recognize that it can be extremely difficult to draft a contract that anticipates every possible circumstance that might undermine the work. As a result, courts in most states (including Iowa, Minnesota, North Dakota, and South Dakota) have found that some version of this implied duty exists in every contract.

This presents both opportunities and challenges for contractors. When a job suffers because one party refuses to cooperate, an implied duty may offer a legal remedy. But it can be difficult to know about, much less prove, a violation. Applying the duty to real-world situations is also challenging because it is nearly impossible to find a consistent and meaningful standard that applies to every situation.

  • Some courts hold that the duty “requires the Government . . . to do whatever is necessary to enable the other party to perform.”
  • Other courts emphasize that the duty is not limitless, and does not require owners to “be nice.”
  • Courts have different opinions about whether the implied duty can be invoked as a standalone violation, or if it can only accompany violation of a written contract term.

There is a wide range of opinions, and no two projects are the same. Nevertheless, it should be clear that building a successful job requires not only a solid grasp of the technical details of the work, but also a commitment to common sense, fairness, and cooperation.

Service. Integrity. Quality.


© 2018 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

GPS Software Quietly Accumulating Data

technology, gps, navigation, business, constructionMost contractors do not want to submit claims. Sometimes, the job that should have been highly profitable threatens to be the worst job in years. This could be due to unexpected utilities or soil conditions, last-minute changes to the plans or site access, or other events that routinely require change orders under low-bid contracts. Sometimes, a claim is the only viable option.

Assuming notice requirements and engineer’s directions were met, the claim still has to be quantified and documented in order to get paid and close out the job. This can be difficult if the job cost report fails to separate bid work from extra work.

Data transmitted by GPS may be an untapped source of evidence that could help quantify and document claims when traditional resources fall short.

Technology and Data

The big heavy equipment manufacturers install GPS units in their new machines during production, and offer data aggregate software to customers at the point of sale. For example, John Deere has JDLink, Caterpillar has VisionLink, and Komatsu has Komtrax. In addition, VisionLink and Komtrax offer to pull in data from other manufacturers’ equipment with aftermarket GPS kits that can be installed in the field.

Each of these software systems connects to the electronic control unit (ECU), which allows the GPS unit to transmit:

  • Service Meter Reading
  • Location
  • Operation Map (times the engine was on/off)
  • Fuel Consumption
  • Residual Fuel Level
  • Residual Diesel Emissions Fluid Level
  • Dashboard Cautions
  • Maintenance Notifications
  • Abnormality Codes
  • Engine Lock
  • Out of Area Alerts
  • Movement Position Reports
  • Actual Working Hours (engine on time less idle time)
  • Eco-mode Usage Hours
  • Load Frequency (hours spent in different load levels determined by pump pressures or engine torque)
  • Payload
  • Odometer Readings

Each manufacturer retains this information, which can be accessed through its website. Data points can then be gathered and sorted into spreadsheets of useful information.

Imagine how this can help document a claim. We can track idle hours and mobilizations. We can verify productivity factored into the bid with productive hours for the same piece of equipment working under normal conditions. We can then compare normal productivity with payloads and load frequencies at impacted locations and dates, and use these comparisons to calculate lost production.

Any contractor that uses GPS technology and subscribes to a data collection service should already have access to this information, which is gathered using the ECU, transmitted by the GPS, and stored by manufacturers. This data could make the difference between recouping and eating extra costs.

Looking Ahead

GPS has transformed how we interact with the world beyond just navigation. Excavators, graders, and pavers rely on GPS controls to create a level of precision that was previously unimaginable. Inspectors and engineers rely on GPS data to measure cross-sections and locate utilities with unprecedented accuracy and efficiency. Owners and taxpayers enjoy better products at lower prices.

Technology can support—not replace—a strong strategy and an experienced team. With the introduction of data aggregate software, GPS and integrated technologies may already be gathering the data that could save the next bad project.

Service. Integrity. Quality.


© 2017 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Worker Misclassification: Avoiding the Road to Ruin


According to the United States Department of Labor, “Misclassification” occurs when a worker, who is an employee under the law, is incorrectly classified as something other than an employee (usually an independent contractor).

The risks of misclassifying workers could affect the worker, the employer, or both. Workers misclassified as independent contractors are subject to self-employment tax. Employers can be held responsible for back wages and taxes, as well as face monetary penalties and other consequences. For example, as mentioned in a previous post, failure to classify a worker correctly could lead to a ban from performing public contracts for up to three years in Minnesota.

Mapping the Route

How can employers be certain they are properly classifying their workers? In Minnesota, courts consider two factors for worker classification:

  1. The right to control the means and manner of performance; and
  2. The right to discharge the worker without incurring liability for damages.

There are other factors in this test, but these are the most important.

Minnesota is not alone in its approach to worker classification: Iowa, North Dakota, and South Dakota also rely on similar factoring tests to determine if worker misclassification has occurred. Each of these states has its own unique set of factors to determine worker classification. But they all confirm that controlling performance is the most crucial factor.

Navigating the Potholes

Last year, the Minnesota Court of Appeals determined that 43 workers were independent contractors rather than employees. In Pemrick v. Department of Employment and Economic Development, workers installed lockers and shelving units on various types of projects with little to no training. These workers also worked on their own schedule. The business (Pemrick) would relay certain information to the workers (such as job location), and the workers would complete the tasks assigned.

When coming to its decision, the court first looked to whether Pemrick had exerted the right to control the means and manner of performance. Specifically, the court examined Pemrick’s “training protocols.” Pemrick demonstrated installation and assembly to at least one inexperienced employee, but the court did not consider this singular occurrence an adequate substitute for formal training.

Next the court looked at the “independent processes” that the workers utilized when completing the work. The court found that Pemrick instructed the workers on completing the work (the ends). Yet the workers utilized their own independent processes (the means), showing that they exerted the requisite amount of control, qualifying them as independent contractors.

Finally, the court examined Pemrick’s ability to exert its “right to discharge” without incurring liability. Examining the discharge practices previously utilized by Pemrick, the court found that “the workers most often completed the jobs for which they were hired, but may not have been hired for another job if they did not do well.” Explaining that this procedure was not equivalent to a discharge, the court determined that these practices also showed that the workers were in fact independent contractors.

Light at the End of the Tunnel

The decision in Pemrick shows how avoiding many of the potential pitfalls that surround worker misclassification can be fact-intensive.

At a minimum, companies who decide to classify their workers as independent contractors should treat these workers the same way they would treat any other business entity. This includes maintaining and keeping all documentation of their relationship, including:

  • All invoices received from the independent contractors;
  • All contracts or agreements; and
  • All relevant tax information.

Companies that utilize independent contractors need to be aware of the role that misclassification could play down the road. Each state has a different approach to determine if misclassification has occurred, but the common thread running between all of state is control. Does the company or the worker control the method and means of the work?

Service. Integrity. Quality.


© 2017 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

UPDATE: Iowa Supreme Court Affirms Decision, Opens Door for Expanded Coverage and Higher Premiums

In a 4 to 3 decision, the Supreme Court of Iowa affirmed the court of appeals’ holding in National Surety Corporation v. Westlake Investments, which we addressed in a previous post. The court confirmed “defective workmanship by an insured’s subcontractor may constitute an occurrence under a modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”

General contractors are typically required to carry commercial general liability (CGL) insurance. If a subcontractor’s work is later determined to be defective, based on the decision in Westlake, the CGL insurance policy may cover costs associated with the subcontractor’s defective work. However, if courts continue to apply Westlake’s analysis—one that could expand CGL policy language—contractors should expect to pay higher CGL premiums in the future.

What is an accident?

The decision in Westlake hinged on the term “accident.” Because the CGL policy did not define this term, the court felt compelled to clarify, looking first to policy language, and finally incorporating a definition found in previous court decisions. The trial court had adopted an interpretation of “accident” that included “continuous or repeated exposure” to harmful conditions, while also suggesting that an accident must be “sudden.” These contradicting definitions led to the Iowa Supreme Court’s split decision.

In his dissenting opinion, Justice Waterman latched on to the suddenness component of the trial court’s definition of “accident.” He observed: “There is nothing sudden about the gradual infiltration of rainwater through leaky window frames over several seasons.” Without a sudden event, Justice Waterman explained, there can be no coverage, regardless of whether the work was performed by the policyholder or its subcontractor. His analysis failed to accept any scenario that would recognize an accident that was not sudden, such as the “continuous or repeated exposure” that occurred in Westlake.

However, while the dissent’s definition of accident was too narrow, the majority’s view went too far. The majority relied on a 1999 Iowa Supreme Court case that denied coverage because the policyholder’s work (not its subcontractor’s) was found to be defective. In its opinion, the majority held that defective workmanship alone may be considered a compensable accident if that work was performed by an insured’s subcontractor. Yet the majority’s analysis failed to require any subsequent event following the defective workmanship, witnessed in Westlake as the gradual intrusion of water. As recognized by many courts and commentators, this subsequent event—not the subcontractor’s defective work—is the accident that triggers CGL coverage, regardless of whether it is sudden or caused gradually by continuous or repeated exposure to a harmful condition.

What’s wrong with better coverage?

More coverage is good, right? Not necessarily. Any windfalls enjoyed because the court included subcontractors’ defective work in CGL insurance coverage will be short lived. If courts continue to find coverage for subcontractors’ defective work alone, it is likely that insurance premiums will increase. As Justice Waterman explained, “the premiums for the policy were priced based on risks under well-settled Iowa law holding [that] poor workmanship is not covered.”

While the court reached the right outcome in Westlake (because there was a subsequent event), it took the wrong road to get there, and in doing so created precedent that might be used to guarantee subcontractors’ work, but will be paid for by higher insurance premiums.

Build it right. Keep it real.


© 2016 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.


Iowa Court of Appeals Ventures into The Twilight Zone of CGL Insurance

Broken WindowImagine a window, installed by your subcontractor, with faulty seals. Are you covered under your liability insurance if water seeps through those seals?

General liability (or CGL) insurance is everywhere. It is an essential tool required by construction contracts, yet it might be one of our most mysterious tools. Sometimes, knowing if and when coverage is triggered can take us into a land “between light and shadow, between science and superstition.”

A case that may soon be headed to the Iowa Supreme Court helps unlock the mysteries of one common coverage question:

Are you covered for losses caused by subcontractors’ faulty work?

Expanding Coverage in Iowa: The Subcontractor Exception

In October, for the first time, an Iowa appellate court recognized the subcontractor exception, providing CGL coverage for damage to work performed on your behalf, or damage caused by that work, which is otherwise excluded from coverage.

In National Surety Corporation v. Westlake Investments, the court affirmed coverage after a subcontractor’s faulty work in a 300-unit apartment complex led to water penetrating several units.

The decision should assure Iowa contractors they will be protected when their subcontractor’s faulty work (like installing windows with faulty seals) leads to a subsequent event or occurrence that causes property damage (like water leaking through those seals).

In addition to Iowa, this important exception has been recognized in most states, including Minnesota, North Dakota, and South Dakota.

CGL Insurance Coverage Always Starts With an Accident

The Iowa Court of Appeals’ Westlake decision requires some context. It makes no difference who performed the work if coverage is not first triggered by an occurrence.

Standard CGL policies define an “occurrence” to include an accident, but the policies do not define “accident,” so state courts have stepped in. Courts generally require accidents fit within the purpose of CGL insurance, which does not include guaranteeing contract performance or eliminating business risks.

Following this approach, even subcontractors’ faulty work is not always covered. First, something else (an occurrence) has to happen in order to unlock that door. Only then does it matter who performed the work.

In other words, CGL insurance in most states will be triggered not when somebody installs faulty seals around windows, but when water seeps through those seals. For example:

  • In Iowa, Westlake involved poor workmanship in an apartment complex—coverage was triggered after water penetrated several units.
  • In Minnesota, a subcontractor installed defective coping stones in a swimming pool—coverage was triggered after several of those stones cracked and caused injuries.
  • In North Dakota, a subcontractor installed bad footings and poorly compacted soil—coverage was triggered after substantial shifting caused property damage.
  • In South Dakota, a subcontractor left voids in insulation and failed to securely attach a vapor barrier—coverage was triggered after the vapor barrier fell and temperature fluctuations caused property damage.

In each instance, faulty work led to some other event to trigger coverage.

Questions of Time and Space

If the Iowa Supreme Court takes up Westlake, it should affirm the decision. The Iowa Court of Appeals reached the right result because faulty work led to a subsequent event (water penetration), unlocking the door to the subcontractor exception and providing coverage for losses caused by work performed on the insured contractor’s behalf.

As a member of the construction industry and an advocate for contractors, I hope the Iowa Supreme Court also takes the opportunity to clarify an important nuance of CGL insurance coverage: an occurrence can trigger initial coverage even if the damaged property does not extend beyond your work.

In The Twilight Zone of CGL coverage, if there was no “occurrence,” there are no exceptions. On the other hand, if the sole issue is that the damaged property did not extend beyond your work, there are exceptions, including if a subcontractor’s work is involved.

In the unfortunate event you ever have to defend a claim for property damage or bodily injury, the subcontractor exception may be the only thing standing between your business and dimensions of risk you’d rather not imagine.

Build it right. Keep it real.


© 2016 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Workers’ Comp Benefits Awarded to Prankster in South Dakota

boy and girl playing on construction site

The South Dakota Supreme Court awarded workers’ compensation benefits this summer to an employee who injured himself while running away from a co-worker he had just pranked.

While waiting for a delivery, a hot and bored concrete laborer coaxed his co-worker out of an air-conditioned truck so he could enjoy it himself. After cooling down in the truck and seeing the agitated co-worker, he impulsively ran away, tried jumping across a trench, landed awkwardly, and broke his ankle. He sought workers’ compensation benefits for the injury.

For him to recover benefits under South Dakota’s workers’ compensation laws, his injury had to (1) arise out of and (2) be within the course of his employment. In Petrik v. JJ Concrete, the court found that this act of horseplay not only arose out of his employment, but did not substantially deviate from his job duties and therefore occurred in the course of employment.

When does horseplay arise out of employment?

To arise out of employment, the job must somehow contribute to the injury. Mr. Petrik was injured while waiting for the next concrete truck to arrive. The South Dakota Supreme Court recognized that “playing a prank on a co-worker during an idle period is [an activity] in which employees might reasonably engage.” The court therefore agreed that the injury arose out of the employment.

When is horseplay within the course of employment?

The South Dakota Supreme Court considered four factors to answer the close question of whether this particular act of horseplay was a “substantial deviation” from the job duties. The court ultimately decided it was not, and therefore was within the course of employment.

  1. Was the horseplay a serious deviation from job duties? The court decided that the momentary and impulsive decision to run from a co-worker was not a serious deviation, particularly because the horseplay happened during a lull in work.
  1. Was the horseplay a complete deviation from job duties? Although the worker engaged in prohibited horseplay, this happened while waiting for a concrete delivery, so the employee did not abandon his job duties.
  1. Was the horseplay an accepted part of the job? The third factor seemed to cut against awarding benefits, but was outweighed by the other factors. The employer did not tolerate horseplay. Running on the job site was against the rules, and each employee had received a manual with the safety policy. Minor jokes and pranks were known to happen, but these were not a regular occurrence. 
  1. Was the horseplay an expected part of the job? The court did not buy the employer’s argument that because concrete work is difficult and repetitive, workers should be expected to sit still and do nothing during downtime. When employees are regularly on standby, they will likely engage in some kind of activity, which might include joking, goofing around, and horseplay.

Although the South Dakota Supreme Court agreed that running on the job site was dangerous, misguided, and against the rules, in this particular case it was not deliberate or conscious, and the employee did not abandon his job duties, so it was within the course of the employment.

“Idle hands are the devil’s workshop.”

So what lessons can the South Dakota Supreme Court’s decision to award benefits teach us?

First, this case tells us that employees who are injured while breaking rules can still receive benefits in certain situations. The supreme courts of Iowa, Minnesota, and North Dakota have all recognized similar rules.

Second, this case illustrates the reverence given to workers’ compensation as the only remedy available to most employees for on-the-job injuries. Workers’ compensation laws protect employers from tort liability in exchange for giving injured employees an efficient no-fault remedy.

Finally, this case serves as an important reminder that keeping employees safe and busy can sometimes be the same thing.

Build it right. Keep it real.


© 2015 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.