Troutman Sanders LLP: Construction Owner, General Contractor and Subcontractor Held Liable For Sub-Subcontractor Failure to Procure Required Liability Insurance

Troutman Sanders LLP: Construction Owner, General Contractor and Subcontractor Held Liable For Sub-Subcontractor Failure to Procure Required Liability Insurance

A recent decision by the Georgia Court of Appeals opens up a new (and potentially troubling) avenue for relief in cases involving personal injury and property damage caused by downstream subcontractors on a construction project. If not overturned, this decision would expose Georgia owners, prime contractors and upper tier subcontractors to breach of contract liability for failing to ensure that all downstream subcontractors have secured and maintained required liability insurance coverage. 

The potential liability created by the Court of Appeals is viewed by many as a radical departure from existing law and as contravening commonly-held views of the workers compensation law, third party beneficiary rights, and customary construction contract risk division.

Estate of Pitts v. City of Atlanta [enhanced version available to lexis.com subscribersinvolved claims arising from the death of a construction worker killed when a vehicle driven by an employee of a sub-subcontractor trucking company struck him while he was working on a project at the Atlanta Hartsfield-Jackson International Airport. The decedent's estate originally brought suit in negligence against only the subcontractor trucking company and the company employee that caused the fatality. The estate obtained a multimillion-dollar wrongful death judgment against both defendants. However, neither defendant could satisfy the judgment. 

Thereafter, when it was revealed that the subcontractor's automobile liability insurance was short of the coverage specified by the prime contract and was thus insufficient to satisfy the judgment, the estate was forced to look for deeper pockets. It found those deep pockets by employing a novel theory of relief against the owner, the prime contractor and the first-tier subcontractor. 

Essentially, the estate argued that these upper tier parties had breached their contractual obligations to ensure that the lower tier subcontractor whose employee was directly at fault carried and maintained the amount of insurance specified by the prime contract. The trial court dismissed these claims, arguing that the estate lacked standing to enforce the contractual minimum insurance requirement because the decedent had not been a third-party beneficiary to the contracts setting forth that requirement. The Georgia Court of Appeals reversed this decision and held that the decedent was, in fact, a third-party beneficiary of the subject contracts.

To make a claim as a third-party beneficiary, a claimant has to show that the parties to the contract clearly intended to provide a benefit to that claimant. The benefit cannot be merely incidental, but must have been intended. Although the decedent in Pitts was not specifically named as a beneficiary in either the prime contract or the subcontract and had probably never even seen these contracts, the Court of Appeals found that the decedent was still a third-party beneficiary. 

The Court based this decision on the fact that the "Owner's Controlled Insurance Program," which was made part of the prime contract and was incorporated into the subcontract, stated that its purpose was to "provide one master insurance program that provides broad coverage with high limits that will benefit all participants involved in the project." Since, the Court reasoned, this language indicated an intent to benefit "all participants" in the construction project and an employee of a subcontractor working on the project clearly qualifies as a participant in the project, the decedent was a third-party beneficiary of the subject contracts.  

Because the decedent was a third-party beneficiary, the decedent's estate had standing to sue the owner, the prime contractor and the first-tier subcontractor for breach of contract - and the Georgia Court of Appeals ruled for the estate on this claim. In the Court's view, these upper tier parties breached their contractual obligations by failing to guarantee that the second-tier subcontractor trucking company had the specified amount of automobile liability coverage.

This decision is troubling for a number of reasons. First, it applies an extremely broad interpretation of the concept of the third-party beneficiary. In similar factual situations, construction employees at all levels within the chain of contracts could be found to be third-party beneficiaries of prime and subcontract insurance requirements. In practice, this opens up an avenue for direct recourse for breach of contract against any upper tier contracting parties and thus puts these upper tier parties at risk of breach of contract liability even though they have little or no practical ability to guarantee that lower tier subcontractors have purchased and maintained the contractually specified insurance coverage. 

Additionally, the fact that the Court found that the upper tier parties "breached their contract" obligations by failing to guarantee that the subcontractor had the specified amount of automobile liability coverage might also have troubling repercussions, for insurance policies generally exclude liability for contractual claims that are separate and independent of any negligent act or any statutory employer liability. Thus, if this ruling is followed, it could result in otherwise properly insured parties being left to incur the cost of defense and any resulting liability as an uninsured loss.

The defendants in this case have petitioned for certiorari. However, until and unless this decision is reversed, parties to construction contracts need to be exceedingly vigilant about: (1) the insurance requirements and third-party beneficiary language in their prime and subcontracts and (2) whether lower tier subcontractors are satisfying specified insurance coverage requirements at the outset of and throughout the construction period.

If you need assistance in assessing the impact of this decision on your Georgia construction projects, or if you need to discuss practical solutions to the risk exposure created by the Georgia Court of Appeals, the Construction Practice Group at Troutman Sanders can help.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.

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