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Anatomy of a Construction Claim:

The Long and the Short of It
Speakers: Ben Westcott, Co-Managing Shareholder with Andrews Myers &
Lee Shidlofsky, founding member of Shidlofsky Law Firm
 Topics
• War Stories: The Ocean Tower Condo & Minute
Maid Park

• How to Avoid Claims

• How to Navigate Claims

• How to Make Sure the Insurers Do the Right

thing
 Contractual Risk Transfer

• Insurance

• Indemnification

• Surety Bonds /
Default Insurance
Typical Construction Defect Case
Occupant Insurance

Owner/Developer Insurance

Insurance Contractor Design Consultants

Insurance

Building Product
Subcontractors Material Suppliers
Manufacturers

1
Insurance Insurance Insurance
The Ocean Tower Condominium
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• 134-unit skyscraper built on South Padre Island

– 31-stories of “unprecedented views over the ocean”
– 151 condos, 4 highspeed elevators, a spa, fitness
center, and fully-manned beachfront facilities
– “Highest structure in the Rio Grande Valley”
– Amenities included Italian marble floors, granite
counter tops, stainless steel appliances, custom
cabinets, etc.
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• Ocean Tower hired Raba Kistner.

– Represented that it was the “pre-eminent soil
engineering firm in Texas” and an expert on the soils
of Padre Island.
– Represented it would work tightly with foundation
subcontractor and structural engineer
– Prepared soil tests, gave instructions to foundation
subcontractor, field-tested pile samples, and signed
off on foundation as poured.
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• Ocean Tower hired Datum Engineers.

– Represented itself as fully qualified structural
engineer
– Represented itself as being able to engineer the
structure itself
– Accepted the foundation signed off on by Raba
Kistner  allowed for no settling of structure
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• Ocean Tower hired Zachry Construction.

– Represented having extensive concrete poured
building experience, engineers on staff to double
check all measurements and dimensions, and that it
would deliver quality product.
– Ocean Tower allowed Zachry to prepare contract with
subsidiary Coastal Constructors, which Zachry
guaranteed.
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• May 2008  Developers noticed cracks in

the columns supporting the parking
garage.
– Parking garage + tower mistakenly built
connected, forcing weight down on garage
instead of more solid “expansion joints.”
– Tower’s core sunk 14 to 16 inches
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• July 2008  Ocean Tower reassured

investors that while the project would be
delayed, the skyscraper would reemerge
“stronger and safer than ever.”
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• November 2008  News of Suspension

Broke
– “We are deeply disappointed to report that
the construction of Ocean Tower, which was
suspended in May, has been terminated with
no immediate prospects for completion.”
– More than 100 of 151 condos sold
– Building abandoned for almost a year
The Ocean Tower Condominium
“The Leaning Tower of South Padre Island”

• December 13, 2009  376-foot unfinished

skyscraper brought down with a controlled
implosion
– 55,000 tons  LARGEST implosion of a reinforced
concrete structure in the world
– 98% of above-grade materials used in construction
scheduled for recycling/reuse in effort to recuperate
losses
The Ocean Tower Condominium
What went wrong?

AREA SETTLEMENT
Settlement of the Structure
Beneath Tower Core 14 to 16 inches

Beneath Tower Exterior 8 to 14 inches

Beneath West Parking Garage 4 to 8 inches

Beneath East Parking Garage 1 to 2 inches

 Insurance
• First-Party Insurance
– Builders Risk Insurance
– Soft Cost Coverage
• Third-Party Insurance
– CGL
– Professional Liability
– Pollution
• Wrap Insurance Policies
• Project-Specific Policies
Minute Maid Park
 The Parties
HC-HSA
(Owner)

HOK Brown & Root

(Designer) (Constructor)

M-E Engineers Way

(MEP Designer) (M&P Constructor)

PCI
(M&P Insulator)
 Topic Outline
1. Value engineering issues
2. Design liability-deviations in submittals
3. Indemnity claims / Insurance Issues
4. Inconsistency in dispute resolution
 Chilled Water Insulation

Original schematic design specified

fiberglass insulation.
 Chilled Water Insulation
• Design then changed from fiberglass to
phenolic foam.
 Chilled Water Insulation
• Sub priced the change from fiberglass to
phenolic foam at the cost of $300,000.00.
 Chilled Water Insulation
• HCHSA approved the installation of fiberglass in
its contract with Brown & Root after being told of
the differences by the foam glass manufacturer.
 Checklist for VE’s

•Document the VE Process. (Review and Approve)

•Limit liability in contract to exclude design liability.
• Suggestions should be based on prior experience (what
some other Architect approved), not present evaluation
•Make sure VE matches actual scope to be performed
• Make the Architect/Owner accept or reject the
suggestion in writing.
• Make the Architect update the plans and specs to
reflect the change.
 Chilled Water Insulation
• M-E and Brown & Root approved the Way.PCI
submittal for the insulation in April of 1999.
 Problems with Submittals
What happens when the contractor
changes the design through the submittal
process?
– The Architect claims that it should be viewed
as a substitution and therefore the contractor
is responsible for the performance of the
substituted item
 Design Responsibility
•"Contractor shall not be liable to the Owner or the
Architect for damage resulting from errors,
inconsistencies or omissions in the Contract
Documents unless the Contractor recognized such
error, inconsistency or omission and knowingly
failed to report it to the Architect"
•Texas courts have consistently held that this
specific provision means that as between the
Contractor and the Owner, the Owner is
responsible for design errors.
• See Alamo Community College District v. Browning
Construction Company, 131 S.W.3d 146, 155
(Tex.App.--San Antonio 2004, pet. denied).
 Problems with Submittals
• What should the Engineer do:
– Require the Contractor’s to clearly identify any
changes made during the submittal process
– Require that any material changes be
documented in the form of a change order
and not through the submittal process only
– Require that the architect sign off/approve any
change before proceeding with the changed
work
 Indemnity/Insurance Claims

• Discuss flow down

• Discuss inconsistency between O-A and
A-E contracts
• Discuss prohibition against indemnity of
architects/engineers
• Wrap Policy
– Joint Defense
– Competing Interests
– Limits
 Dispute Resolution Conflicts
• The O-GC contract contains a
predetermined private disputes board
• The O-A contract contains court with
waiver of jury trial.
• The GC-Sub contains AAA arbitration.
• The Sub-Sub/Sub contract contain neither
• What happens?
– 4 different claims/some in court/some not
 Dispute Resolution Conflicts
• Need standardized dispute resolution
procedure for all project participants.
• Requires the Architect to take the lead and
point out the potential problem to the
owner.
• Requires agreement between all parties.
• When all else fails, agree to go to the court
house together if you have to.
• Cheaper, quicker to do it all at once.
 Conditions
• Notice
– Provide notice “as soon as practicable”
– “Immediately” forward suit papers
– Watch out for claims-made coverage
– Failure to provide notice can result in
forfeiture
• pre-tender defense costs
• complete forfeiture depending on prejudice
 Conditions
• Settlement Without Consent
– No voluntary assumption of liability
– Probably must show prejudice
• “The mere fact that the insurer owes money that it
does not wish to pay does not constitute prejudice
as a matter of law.”
• Prejudice may be established as a matter of law,
however, when “the insurer is not consulted about
the settlement, the settlement is not tendered to it
and the insurer has no opportunity to participate in
or consent to the ultimate settlement decision.”
• Duty to Cooperate
 Three More Things to
Remember
• Always check to see if
you are an additional
insured or otherwise
qualify as an insured
on another policy
• Don’t rely on
certificates of
insurance
• Don’t just accept it as
true when the
broker/insurer says its
not covered
DISCUSSION

Questions?
Andrews Myers, PC
3900 Essex Lane, Suite 800, Houston, TX 77027
98 San Jacinto Boulevard, Suite 300, Austin, TX 78701
www.andrewsmyers.com

Shidlofsky Law Firm PLLC

7200 North Mopac Expressway, Suite 430
Austin, Texas 78731
(512) 685-1400
www.shidlofskylaw.com

We’ve Got
You
Covered!