Tag Archives: statute of limitations

New AMA Classification Of Obesity: How It Affects Workers’ Compensation And Mandatory Reporting

On June 16, 2013, the American Medical Association voted to declare obesity a disease rather than a comorbidity factor. This change in classification will affect 78 million American Adults and 12 million children. The new status for obesity means that this is now considered a medical condition that requires treatment. In fact, a recent Duke University / RTI International / Centers for Disease Control and Prevention study estimates 42 percent of U.S. adults will become obese by 2030.

According to the Medical Dictionary, obesity has been defined as a weight at least 20% above the weight corresponding to the lowest death rate for individuals of a specific height, gender, and age (ideal weight). Twenty to forty percent over ideal weight is considered mildly obese; 40-100% over ideal weight is considered moderately obese; and 100% over ideal weight is considered severely, or morbidly, obese. More recent guidelines for obesity use a measurement called BMI (body mass index) which is the individual's weight divided by their height squared times 703. BMI over 30 is considered obese.

The World Health Organization further classifies BMIs of 30.00 or higher into one of three classes of obesity:

  • Obese class I = 30.00 to 34.99
  • Obese class II = 35.00 to 39.99
  • Obese class III = 40.00 or higher

People in obese class III are considered morbidly obese. According to a 2012 Gallup Poll, 3.6% of Americans were morbidly obese in 2012.

The decision to reclassify obesity gives doctors a greater obligation to discuss with patients their weight problem and how it's affecting their health while enabling them to get reimbursed to do so.

According to the Duke University study, obesity increases the healing times of fractures, strains and sprains, and complicates surgery. According to another Duke University study that looked at the records for work-related injuries:

  • Obese workers filed twice as many comp claims.
  • Obese workers had seven times higher medical costs.
  • Obese workers lost 13 times more days of work.
  • Body parts most prone to injury for obese individuals included lower extremities, wrists or hands, and the back. Most common injuries were slips and falls, and lifting.

The U.S. Department of Health and Human Services said the costs to U.S. businesses related to obesity exceed $13 billion each year.

Furthermore, a 2011 Gallup survey found that obese employees account for a disproportionately high number of missed workdays. Also earlier National Council on Compensation Insurance (NCCI) research of workers' compensation claims found that claimants with a comorbidity code indicating obesity experience medical costs that are a multiple of what is observed for comparable non-obese claimants. The NCCI study demonstrated that claimants with a comorbidity factor indicating obesity had five times longer indemnity duration than claimants that were not identified as obese.

Prior to June 16, 2013, the ICD code for comorbidity factors for obesity in workers' was ICD-9 code 278. This is related to obesity-related medical complications, as opposed to the condition of obesity. Now the new ICD codes will indicate a disease, or condition of obesity which needs to be medically addressed. How will this affect work-related injuries?

Instead of obesity being a comorbitity issue, it can now become a secondary claim. If injured workers gain weight due to medications they are placed on as a result of their work-related injury or if an injured worker gains weight since they cannot exercise or keep fit because of their work-related injury and their BMI exceeds 30, they are considered obese and are eligible for medical industrially related treatment. In fact, the American Disability Act Amendment of 2008 allows for a broader scope of protection and the classification of obesity as a disease means that an employer needs to be cognizant that if someone has been treated for this disease for over 6 months then they would be considered protected under the American Disability Act Amendment.

Consider yet another factor: with the advent of Mandatory Reporting (January 1, 2011) by CMS that is triggered by the diagnosis (diagnosis code), the new medical condition of obesity will further make the responsible party liable for this condition and all related conditions for work-related injuries and General Liability claims with no statute of limitations. It is vital to understand that, as of January 1, 2011, Medicare has mandated all work-related and general liability injuries be reported to CMS in an electronic format. This means that CMS has the mechanism to look back and identify work comp related medical care payments made by Medicare. This is a retroactive statute and ultimately, it will be the employer and/or insurance carrier that will be held accountable.

The carrier or employer could pay the future medical cost twice — once to the claimant at settlement and later when Medicare seeks reimbursement of the medical care they paid on behalf of the claimant. This is outside the MSA criteria. The cost of this plus the impact of the workers' compensation costs as well as ADAA issues for reclassification of obesity for an employer and carrier are incalculable.

The solution is baseline testing so that only claims that arise out of the course and scope of employment (AOECOE) are accepted. If a work-related claim is not AOECOE and can be proved by objective medical evidence such as a pre- and post-assessment and there is no change from the baseline, then not only is there no workers' compensation claim, there is no OSHA-recordable claim, and no mandatory reporting issue.

A proven example of a baseline test for musculoskeletal disorders (MSD) cases is the EFA-STM program. EFA-STM Program begins by providing baseline injury testing for existing employees and new hires. The data is only interpreted when and if there is a soft tissue claim. After a claim, the injured worker is required to undergo the post-loss testing. The subsequent comparison objectively demonstrates whether or not an acute injury exists. If there is a change from the baseline site specific treatment, recommendations are made for the AOECOE condition ensuring that the injured worker receives the best care possible.

Baseline programs such as the EFA-STM ensure that the employee and employer are protected and take the sting out of the new classification by the AMA for obesity.

He Who Sits On His Rights Loses Them

Never Ignore the Statute of Limitations
The Wisconsin Court of Appeal was called upon to resolve a dispute over the application of a statute of limitations in a suit against American Family Mutual Insurance Company, Gage Creighbaum, Sherry Lagios, and Dimitrios Lagios (the “defendants”) who appealed an order denying their motion to dismiss. The trial court held that the defendants waived their statute of limitations defense by not raising it prior to filing their notice of appearance and serving their request for admissions in response to Maas’ amended complaint. In Justin M. Maas v. American Family Mutual Insurance Company, Gage M., No. 2011AP1661 (Wis.App. 08/01/2012) the Wisconsin Court of Appeal resolved the issue.

Background
On August 20, 2007, Creighbaum crashed his vehicle into a vehicle operated by Maas, resulting in personal injury to Maas. On August 18, 2010, two days before the end of the three-year statute of limitations period, Maas filed a summons and complaint against the defendants related to his injuries. Maas failed to serve any of the defendants with the summons and complaint.

Maas filed an amended summons and complaint on February 15, 2011, which he served on the defendants. The amended summons and complaint contained the same cause of action and named the same defendants as the original summons and complaint. The defendants filed an answer to Maas’ amended summons and complaint alleging Maas failed to obtain proper service of process on Creighbaum and the Lagioses and the court therefore lacked personal jurisdiction over them and alleged that Maas’ claim was barred by the statute of limitations.

The trial court denied the motion, concluding that the defendants’ failure to raise their jurisdictional objection prior to filing the notice of appearance and serving the request for admissions constituted a waiver of their statute of limitations objection. The court further held that Maas’ action was properly commenced and that the amended complaint related back to the original complaint.

Analysis
On appeal, the defendants argued that even though Maas filed his original summons and complaint two days prior to the running of the three-year statute of limitations period, his claim is barred because he failed to serve any of the defendants with the summons and complaint within ninety days of the filing as required by Wisconsin statutes.

The Wisconsin Court of Appeal concluded that the statutes are clear. An action to recover damages for personal injuries shall be commenced within 3 years or be barred. An action is commenced as to any defendant when a summons and a complaint naming the person as defendant are filed with the court, provided service of an authenticated copy of the summons and of the complaint is made upon the defendant within 90 days after filing. Thus, if service is not made within ninety days of the filing of the summons and complaint, the action is not commenced. If not commenced within the three-year statute of limitations period, the action is barred.

It was undisputed that Maas failed to serve any of the defendants with the original summons and complaint within ninety days of filing. Wisconsin procedure requires, therefore, that the court conclude his action was never commenced prior to the running of the limitation period and is therefore barred.

Maas’ failure to serve the defendants with the original summons and complaint within ninety days was a fundamental defect which deprived the trial court of personal jurisdiction over the defendants and rendered the original pleading a legal nullity. The trial court conclusion that the defendants waived their jurisdictional objection by failing to raise the objection when they filed their notice of appearance and served their requests for admissions in response to Maas’ amended pleading fails since there was nothing for the defendants to waive.

Conclusion
Maas’ failure to serve the defendants with the original summons and complaint within ninety days resulted in the three-year statute of limitations period expiring without an action having been commenced. The failure was a fundamental defect which rendered the pleading a legal nullity and could not be remedied by the subsequent filing of an amended pleading after the statute of limitations period expired.

Statutes of limitation were designed to protect people against stale claims because, if suit is not filed promptly, memories fade and witnesses can move away from the jurisdiction. Parties and lawyers that wait until the last moment to sue are taking a chance of losing those rights because of their sloth. Mr. Maas is not without a remedy, however, because his lawyer’s failure to serve the defendants within the 90 days allowed by statute might allow for a case against the lawyer for failing to act within the custom and practice of lawyers in his community.

Although the waiver argument was original and successful in the trial court it did not stand up to scrutiny since no one can waive a nullity nor can a cause of action be created by waiver.

Construction Defects: A Primer For Construction Financial Managers

The construction industry's reputation has been tarnished by poor quality performance. Construction defects decrease the satisfaction of property owners and erode the confidence of the financiers, buyers, and end users of construction projects.

Total construction costs are increased by lost productivity, and higher rework and insurance costs. Defective construction undermines the reputations of affected contractors and threatens their profitability.

Until recently, Construction Financial Managers outside the homebuilding sector may not have heard of or thought much about construction defects. However, these defects are now an industry-wide issue.

Likewise, while formerly concentrated in the western states, construction defects are now a national concern to all Construction Financial Managers involved in either general contracting or the specialty trades within commercial building.

With a rise in reported construction defects, companies — now more than ever — need to improve quality during the construction life cycle.

This article discusses the basics of construction defects, and presents the barriers to and indicators of quality construction — in addition to the risk management consequences of poor quality performance.

The Origins of Construction Defects

Construction defects occur at the intersection of construction operations, real estate transactions, contract law, and business insurance.

A construction defect is a component of construction that is not built according to plan, specification, or in conformance to established construction codes and industry standards of care.

To be considered a construction defect in the eyes of the legal and judicial systems, physical damage to tangible property or bodily injury must result from the alleged defective construction.1 Construction defects can also include the loss of use of the “impaired property” — property that is not physically damaged, but is rendered unusable due to defective construction work.

Unfortunately, in our litigious judicial system, reality does not always match theory. Sometimes, “alleged” construction defects are pursued because attorneys think there's a good chance of winning a verdict or receiving a settlement. This can also happen when a group of people, such as a homeowners association, is “unified” for the purpose of class-action litigation.

In the U.S., the general legal doctrine that governs the sale of property is caveat emptor, or “let the buyer beware.” In order to receive legal protection, buyers have a general duty to inspect their prospective purchases before taking possession. The legal system recognizes the inherent limitations of such inspections, and therefore distinguishes between two types of defects: patent vs. latent.

There is a fundamental and legal difference between patent defects found during the course of construction and latent defects that manifest later.

Patent defects are regarded as conditions that can clearly be observed or detected in a reasonably thorough inspection prior to the sale or transfer of the property from the seller to the buyer. In contrast, latent defects are faulty conditions in a property that could not have been discovered during a reasonably thorough inspection.

Types of Construction Defects

The types and causes of construction defects vary and are influenced by many factors, which are commonly categorized into the following eight types:

  1. Improper design;
  2. Poor workmanship that leads to poor finishing quality;
  3. Improper means or methods of installation or fastening;
  4. Improper materials;
  5. Defective material or poor material performance;
  6. Missing or inadequate protection from weather or environmental conditions;
  7. Water intrusion/infiltration and moisture; and
  8. Soil subsidence or settlement.

These types of construction defects result from one or more common causal factors. Researchers at the University of Florida reviewed the common causes and types of building occupancies most often implicated in construction defects.

This study revealed that 45% of all construction defect claims occurred in multifamily housing.2 (A large percentage of which presumably relates to condominiums, given the potential for class-action litigation by homeowners associations.)

Another major study found that “…84% of claims are associated with moisture-related defects in building envelope systems (69%) and building mechanical systems (15%).”3

Causes of Construction Defects

The most common causes of construction defects are: 1) the nature of the construction industry itself, and 2) climate, weather, and environmental factors. Let's look at how scheduling pressures and sequencing issues are driven by both causes, and review their potential negative impact on construction quality.

Scheduling Pressures
Contractors face increasing demands for shorter schedules and faster project completion. The potential adverse effects of these types of pressures include cost overruns and nonconformance to specifications, as well as other quality issues.

As these increased schedule pressures contribute to compromised quality performance, the number of construction defects increases. The rework necessary to rectify these quality issues also adversely impacts productivity — and jeopardizes the project's overall profitability, as well as the profitability of all parties involved.

Sequencing Issues
A problem related to scheduling pressures is the improper sequencing of material delivery and/or subcontractor trades. Construction projects require precise coordination of various suppliers and subcontractors. Conditions are ripe for latent construction defects when weather-sensitive materials, such as drywall boards, are delivered to a jobsite before the building has been enclosed and is weather-tight.

For example, if a load of drywall is exposed to moisture from humidity, dew, or rain, then the likelihood of mildew or mold increases. Likewise, if the various subcontractor trades are not properly sequenced, then additional punch list items or rework can result.

Exhibit 1 below summarizes quality management barriers and lists the factors that contribute to construction defects at the industry, company, and project levels.

Exhibit 1: Barriers of Implementing Quality Management in the Construction Industry

Industry Factors Company Factors Project Factors
Traditional split between design, engineering, and construction functions Type of company: GC vs. Specialty Trade contractor Multiple parties involved in construction (subcontractors, sub-tiers, and suppliers)
No uniform definition for quality or quality management Percentage of lump sum (hard bid) vs. negotiated work Design factors, especially the building envelope
Increasing number of fast-track projects Typical project delivery method used: Design/Bid/Build vs. Design/Build Tight scheduling and sequencing of trades and tasks
Historically thin profit margins that shift priorities away from quality Owner selection process and percentage of work for repeat owners Jobsite geotechnical factors: water table, drainage, and soil type
Conflicting definitions of what constitutes rework Commitment to a zero defects and management accountability culture No overall assigned responsibility for quality management at the project level
Long tail before latent construction defects manifest as completed operations claims Historical performance with liability insurance, especially completed operations claims for latent construction defects Third-party design review completed and course of construction conformance inspections scheduled
Contractual risk transfer of liability through indemnification and additional insured contract requirements Insurance program structure: deductible vs. guaranteed cost program, limits purchased, and premiums paid Weather (especially wind-driven rain) and climate factors (including differential thermal vapor transfer due to temperature, humidity, air flow, and ventilation)
Lack of uniform quality management metrics to establish performance baselines or benchmark comparisons Quality control and quality assurance staffing, programs, policies, procedures, and protocols Lack of uniform methods to measure or monitor quality performance during the course of construction
Lack of systematic method for allocating uninsured indirect costs of poor quality Failure to develop job costing method to capture and chargeback indirect costs of poor quality Indirect costs not captured and charged-back to project in job costing

The Role of Insurance

Risk Financing
Insurance is a financial risk transfer method that may help resolve construction disputes or litigation that involves alleged defective construction. Insurance pays on behalf of an individual or business when two conditions are met:

  1. It is proven that one party is liable for causing or contributing to the construction defect; and
  2. It is determined that the party has a legal duty to correct or otherwise remedy the defective conditions.

Commercial General Liability Coverage
Specifically, Commercial General Liability Insurance is purchased to cover payments for bodily injury and property damage sustained by third parties arising out of business operations. These damage claims are known as third-party liability claims.4

Construction-related Commercial General Liability property damage losses are further divided into losses that occur during two different timeframes: the course of construction and completed operations.

Course of Construction
The course of construction involves construction operations from the inception of building activity until a certificate of occupancy (CO) is issued for the facility.

Completed Operations
The completed operations aspect of Commercial General Liability coverage responds to allegations of construction defects. The completed operations component provides coverage from the time a certificate of occupancy is issued through coverage termination.

The increased severity and volatility of losses in construction insurance primarily stems from losses with a “long tail” — the length of insurance coverage extending beyond the term of the policy.

It's common for the coverage period to extend between 3-10 years (often to match the length of the statute of repose and/or statute of limitation). During the extended coverage period, latent conditions often manifest as insurance claims with associated monetary losses. In construction insurance, the long tail results from alleged and actual construction defects.

Completed Operations vs. Products-Related Coverage
While coverage for completed operations and products are included in the same limit of the policy, there is a distinction between the two types of coverage.

A general rule of thumb: Once a product is incorporated into real property, it loses its characteristic as a product and is considered a “completed operation.”

For example, a contractor that is also a supplier of ready-mix concrete has a “products liability” exposure until the time the concrete is incorporated into the building. At that point, it becomes a “completed operation,” and is subject to all of the provisions of that coverage part — including the potential to respond to construction defect claims.

Statute Of Repose vs. Statute Of Limitation
Generally, companies involved in construction seek to purchase completed operations insurance to correspond with either the legal statute of repose or statute of limitation. Both the statutes of repose and limitation restrict the total time period contractors are subject to liability.

What's the difference? The statute of repose is a specific legal limitation or length of time following the completion of the project in order to provide the owner or occupants an opportunity to discover if defects or non-conformance to specifications need to be rectified by the contractor. The statute of limitation bars legal action after a specified length of time following the discovery of a deficiency.

These statutes are state-specific and are used to adjudicate alleged construction defect cases in state court systems. After the expiration of the statute of repose, buyers have no standing to bring legal suit against the property seller.

The statutes of repose range from a low of four years in Tennessee to a high of 15 years in Iowa.5 The most common length of statutes of repose is either seven or ten years.

However, statutes of limitation are shorter for bringing suits once damage is discovered and usually range from 1-3 years.6

Subcontractors & Contractual Risk Transfer
Contracts govern how expectations are communicated, responsibilities are assigned, and risks are allocated to facilitate successful project execution.

Generally, subcontractors are expected to assume responsibility for the work they perform (both financially and legally). One of their legal responsibilities is to purchase insurance as a means to protect the owner and all other parties.

A gap between legal and financial risk transfer can occur if subcontractors are not able to obtain the required types of insurance coverage. This gap can also occur if the required policy limits cannot be obtained or if the coverage has exclusions for particular perils or exposures that are likely to occur during the course of construction.

Quality Management In The Construction Industry

When strictly adhered to, quality management systems instituted by contractors can minimize the need for rework on construction projects.

As the amount of rework decreases, a contractor's performance increases in the areas of quality, productivity, and profitability. Unfortunately, a universal or standard definition of “quality” does not exist within the industry. Instead, many competing definitions are used, including:

  • Customer satisfaction
  • Contract requirements met
  • On-time completion
  • Conformance to specifications
  • Project completed within budget
  • No rework required within warranty period
  • Zero punch list items at project turnover
  • Continuous quality improvement

Leading Indicators
In my article on “Risk Performance Metrics” (in the September/October 2007 issue of CFMA Building Profits), lagging indicators were defined as “passive metrics of prior results without consideration of the activities that influence the results.” So, lagging indicators are retrospective and trigger reactive, tactical responses.

In contrast, leading indicators are metrics established to gauge the effect of activities designed to prevent or counter the metrics that are monitored by the lagging indicators. Accordingly, leading indicators are drivers of strategic and proactive activities consistent with continuous improvement. Exhibit 2 below presents leading indicators for project quality management for the three distinct phases of construction: pre-construction, course of construction, and post-construction.

Exhibit 2: Representative Examples of Leading Project Quality Indicators

Phase of Construction Leading Indicators or Metrics
Pre-Construction

Number of third-party expert reviews on building envelope designs and materials

Number of subcontractors with pre-approved quality programs

Number of projects with site-specific quality plans

Architect approval for changes to specified materials or design specifications

Course of Construction

Number of projects completed with zero punch list items open

Percent of documented moisture evaluations of incoming materials

Number of quality assurance inspections completed

Percent of discovered defects corrected

Percent of notifications on moisture, water intrusion, mold, or other key events

Post-Construction

Percent of completed project files with documented inspections and corrections

Percent of project turnover video training programs documented

Number of signed and certified receipt of turnover documents by owners

Scheduled follow-up inspection process with owners verifying no quality issues

Number of maintenance callbacks during warranty period

The ability to deliver a quality project safely provides a significant competitive advantage among contractors. The integration of safety with quality management enables projects to be built within budget and schedule constraints.

Safety performance is improved through the quality management discipline of “continuous improvement” that increases communication and feedback among workers and supervisors. Similarly, projects with reduced safety incidents experience improved quality, schedule, and cost performance.3

As a risk management professional, I've seen proactive construction companies take various actions to minimize the adverse effects of quality issues.

These actions are divided into the following stages or phases:

  • Awareness
  • Prevention
  • Detection and measurement
  • Mitigation
  • Documentation for defense

The 5 Ps & 5 Rs
Similar to the 6P model as described in my article on “Return to Work: The Foundation for Successful Workforce Development” (in the September/October 2008 issue of CFMA Building Profits), the 5P and 5R models are offered to help increase awareness of construction defect prevention and response. (See Exhibit 3 below)

Exhibit 3: Strategic Processes for Construction Defect Prevention

  • Vision and culture for zero defects, zero punch lists, and/or zero rework
  • Quality management organizational structure and staffing
  • Owner selection practices and risk-adjusted process for project approval
  • Prevention measures throughout the construction life cycle
  • Subcontractor prequalification and oversight process
  • Insurance and contractual risk transfer review
  • Conformance verification vs. nonconformance detection during course of construction
  • Project closeout and owner education processes
  • Warranty period and maintenance callback processes
  • Response and mitigation of known or suspected problems
  • Claim coordination and documentation for defense
  • Measurement and continuous process improvement
  • Management accountability systems that include quality measurement in personnel performance evaluations and decisions about bonuses
  • Quality awareness education and staff training

The 5 Ps are proactive steps focused on quality control and assurance that help prevent construction defects: Program, Policies, Procedures, Protocols, and Practices.

The 5 Rs are reactive steps taken in response to potential or suspected occurrences of defective construction: Report; Response/Investigate; Root Cause Analysis; Remediate, Repair, or other Recourse; and Recordkeeping.

For construction companies, there are potential consequences of not implementing effective quality management systems. One adverse consequence is unintended and undesirable exposure to risk.

As shown in Exhibit 4 below, poor quality performance impacts a company's reputation and has financial, operational, insurance, and legal consequences.

Exhibit 4: Risk Management Consequences of Poor Quality Performance

Consequences Primary Risk Secondary Risk
Decreased productivity due to required rework Operational Financial
Diminished profit margin (or loss) on project Financial Reputation
Delayed turnover of completed projects Operational Reputation
Loss of key clients due to dissatisfaction Reputation Financial
Possible liquidated damages from delayed completion Financial Legal
Higher deductibles, increased premiums, and/or lower limits for liability insurance Insurance Financial
Increased legal costs to defend against alleged construction defect claims Financial Insurance/Legal
Damaged partnerships between GCs and subcontractors Reputation Operational
Fewer opportunities to bid or negotiate for future work due to damaged reputation Financial Reputation
Type and size of projects limited for future work due to lowered surety bond credit line Financial Reputation
Surety bond default and company survival threatened due to decreased corporate profitability Financial Reputation

Industry Changes Since 2009: Proceed with Caution

Since this article first appeared (in the January/February 2009 issue of CFMA Building Profits), the construction industry has experienced challenges and changes that have led to the continued emergence of construction defects as a pressing industry issue. Most notably, the U.S. and global financial crises have contributed to the protracted economic recession and lingering recovery.

There have been some positive outcomes as a result of these changes, including growing awareness of supply chain risk management practices, improvements in building envelope design, the adoption of controls for moisture and water damage prevention, and other construction quality improvement methods and techniques.

However, the aftermath of these challenges includes such negative effects as the precipitous decline in the residential housing and construction markets and marked shifts between private and public construction funding and hard bid vs. negotiated work.

As always, contractors must consider the financial, operational, risk management, and insurance impacts from these and other changes to avoid increased risk.

Specifically, unique challenges occur when contractors pursue business in new states and/or with new partners (owners, subcontractors, and/or joint ventures), use new delivery methods, and involve new types of projects/occupancies and new products and/or materials, with which they have less experience and are beyond their core competencies.

Shifting Sands & Slippery Slopes
The resulting and ever-changing landscape of construction defects has been caused by such factors as:8

  • State legislation and judicial case law interpretations to the legal definitions of an occurrence, property damage, and resulting loss under CGL policies;
  • Increased contention between GCs and subcontractors on matters of contractual risk transfer;
  • The expansion of “business risk” exclusions and exclusionary insurance endorsements vs. the growing availability of construction defect coverage;
  • Unproven impacts of innovative design features, new products, and integrated technologies involved in Leadership in Energy and Environmental Design (LEED) and green construction; and
  • The emergence of e-discovery in construction litigation.

Unfortunately, the lack of aggregated industry data on alleged vs. actual construction defects increases the challenge of finding proven proactive solutions that are focused on prevention. As a result, information has been focused on reactive mitigation strategies based on lessons learned from construction defect litigation outcomes.

Moving Forward

The adoption of quality management systems can positively influence the construction industry's reputation and contractors' bottom lines.

Moreover, those companies that elect to implement quality management systems are more likely to gain a competitive advantage in the form of improved productivity and reduced rework, which leads to higher profitability.

Upfront coordination and rigorous pre-project planning can reduce schedule dynamics that disrupt the entire system of a construction project. Successful project management entails quality, risk, and safety management among owners, designers, engineers, contractors, subcontractors, and suppliers.

Ultimately, with respect to construction defects, prevention is a better strategy than mitigation, and mitigation is a better strategy than litigation.

As incidents of alleged construction defects rise, they pose a serious risk to your company's tangible and intangible assets.

It's critical for contractors to fully understand the specific state legislation and case law that governs construction defects in the jurisdictions in which their companies have completed projects or plan to perform work.

Active, ongoing collaboration with construction specialty professionals in the areas of law, insurance, surety, and accounting can help your company stay abreast of the ever-changing landscape and make informed business decisions.

Endnotes:

1 Wielinski, Patrick J. Insurance for Defective Construction, 2nd Edition, 2005. International Risk Management Institute, Inc. (IRMI). Dallas, TX.

2 Grosskopf, K.R. & Lucas, D.E. “Identifying the Causes of Moisture- Related Defect Litigation in U.S. Building Construction.” www.rics.org/site/download_feed.aspx?fileID=3158&fileExtension=PDF.

3Grosskopf, K.R., Oppenheim, P. & Brennan, T. “Preventing Defect Claims in Hot, Humid Climates.” ASHRAE Journal, July 2008, 40-52.

4 For more information on Commercial General Liability, see Wm. Cary Wright's article, “The Anatomy of a CGL Policy,” CFMA Building Profits, January/February 2009.

5 “Statute of Repose Limitations for Construction Projects.” American Insurance Association, Inc., January 7, 2007.

6Ibid.

7 Chang, A.S., & Leu, S.S. “Data Mining Model for Identifying Project Profitability Variables.” International Journal of Project Management, April 2006, Volume 24, Issue 3, 199-206.

8 “Construction defects: Managing risk, covering exposure.” Business Insurance, www.businessinsurance.com/section/NEWS070102.

© 2012 by the Construction Financial Management Association. All right reserved. This article first appeared in CFMA Building Profits. Used with permission.