Construction Risk Management/Dispute Avoidance

October 2012

The purpose of this article is to provide contractors with an outline for Construction Risk Management and Dispute Avoidance, and to show contractors how to limit liability through proper planning.

First and foremost, contractors must be properly licensed pursuant to California Business and Professions Code § 7030(b) for all jobs over $500. Further, pursuant to Business and Professions Code § 7030.5, contractors are required to identify their contractor's license number in all written construction agreements. Sample construction agreements can be found at

In terms of subcontract agreements, contractors should be sure to clearly identify the contracting entities, detail the subcontractor's scope of work and include specific provisions concerning express indemnity, additional insurance (naming the prime contractor as an additional insured) and attorney's fees/costs available to the “prevailing party” in any litigation stemming from the subcontract agreement. Contractors should also make sure the written agreement is fully-executed before any work is commenced under the terms of the subcontract agreement (Civil Code § 1717(a)). [See also, Civil Code § 2782; Myers Building Industries, Ltd. v. Interface Technology, Inc., (1993) 13 Cal.App.4th 949; Baldwin Builders v. Coast Plastering Corp., (2005) 125 Cal.App.4th 1339; Crawford v. Weather Shield Mftg.(2008) 44 Cal.4th 541.]

Secondly, contractors should take care to select appropriate subcontractors and material suppliers, and must, at all times, properly supervise any and all subcontractors' work on a construction project and inspect the same throughout the course of the project. Contractors can be found directly liable for failing to properly supervise the work of their subcontractors and can also be found vicariously liable for construction defects and resultant damages associated with a subcontractor's work on any project.

Plaintiffs' attorneys are lurking around every corner, ready, willing, and able to pounce on every mistake a contractor makes. Further, contractors should be aware that, pursuant to Stearman v. Centex Homes (2000) 78 CA4th 611, plaintiffs can claim and recover their investigative costs, including expert fees and costs, as an item of damages in any construction defect lawsuit that may be filed.

Commercial general liability insurance is a key component in terms of risk avoidance for any contractor. In considering which insurance policy to select, a contractor should utilize a reputable insurance agent/broker and should pay close attention to deductible amounts and insurance policy exclusions, including, but not limited to, “claims made” exclusions and “prior work” exclusions which may significantly limit what claims the subject policy will actually cover in the event a claim is made and/or a lawsuit is filed. Low insurance premiums are always to be considered. However, saving a few dollars on the front end can result in disaster down the road for a contractor when it is later discovered the subject insurance policy has a high deductible and/or covers very little due to policy exclusions.

Notwithstanding the above, lawsuits are difficult to avoid in this day and age, and the contractor should do whatever he can to assist claims professionals and defense counsel once a claim is pursued or a lawsuit is initiated against the contractor. To assist in this process, contractors need to keep detailed insurance files for both themselves and their subcontractors. Maintaining ACORD insurance certificates is not enough. A contractor's insurance file should also include copies of insurance policies and endorsements, declarations pages and additional insured endorsements when available. Separate insurance files should be kept for each project and every subcontractor utilized during the project and the insurance files should be maintained for at least ten (10) years following the completion of any construction project; there is a 10-year statute of limitations for latent construction defects in the State of California.

As a final note, contractors should promptly notify their insurance representative and/or attorneys when served with a legal summons of any kind. Counsel has thirty (30) days from service of a Complaint or Cross-Complaint to file a responsive pleading in California. [See, e.g., CCP § 432.10 (30-day limit to respond to Cross-Complaint).] If a responsive pleading is not filed within 30 days, the party responsible for serving a summons can, and often will, place the contractor in default. This, in turn, can lead to a default judgment being entered against the contractor. [See, CCP § 473(b) - standard for setting aside default and default judgments entered due to mistake, inadvertence, surprise, or excusable neglect.]

David J. Frankenberger is a partner in the law firm of Ericksen Arbuthnot.