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COVID Construction—Boom to Bust

The pandemic’s impact on demand and potential long-term consequences

September 01, 2021 Photo

There is no question that COVID-19 changed how people do business. The construction industry, as well as construction litigation and associated claims, is no exception.

One of the first noticeable socioeconomic consequences of the pandemic was the surge in unemployment. In the short term, this likely reduced workers’ compensation claims and on-the-job injuries, including third-party personal injury claims. In the very short term, this may have reduced construction-defect claims.

Construction disputes regarding who bears the risk of loss or impossibility of performance and other complications, however, saw an uptick. With the shutdowns, closures, and other restrictions—particularly in the early days of the pandemic—clients and counsel alike were forced to review phrases such as force majeure. Contractual provisions such as who bears the risk of loss for catastrophe, delay, impossibility of performance, and, of course, force majeure were in play in a whole new way. Business interruption claims associated with COVID-19 closures continue to play out in litigation and appeals throughout the country.

If we take no other legal lessons from the pandemic, it should be to ensure that we counsel our clients to prepare for the unexpected and to have the parties’ intentions with respect to the unexpected and the catastrophic accurately, clearly, and prominently set forth in the contract documents. Candidly, there are situations where procuring insurance for every risk one would like to cover is cost prohibitive. However, where available, and within the client’s budget, broadest coverage for such contingencies should at least be reviewed.

Obviously, any coverage for COVID-19-related losses or similar pandemics will come at a significant premium, and not be offered in all circumstances. Coverage will likely involve a special rider or endorsement. COVID-19 losses will not be covered under most current policies under the known loss doctrine.

While looking at contract language, it might be wise to give a second look to the indemnity and additional insured obligations. Many states have established case law requiring indemnity provisions to be exceedingly clear where a claim is made for the indemnitee’s own negligence or liability. Clients should be cautioned not to simply rely upon a certificate of insurance as proof that the client has been included as an additional insured or an additional named insured. This is particularly important when dealing with smaller subcontractors and sub-subcontractors for whom the availability of suitable coverage may be an issue.

Beyond unemployment, we witnessed the fleeing from more urban areas to more suburban and rural areas. In addition to COVID-19, social justice issues may have helped to spur interest in suburban housing. Along with the pandemic and other issues driving folks to move to suburbia, rural resorts, mountain towns, and shore areas for a sense of escape came an increase in demand for housing in these areas and the associated escalating prices.

Another factor influencing the redistribution of housing was the ability for professionals to work remotely. For those who had the expendable income, nowhere to spend it and no desire to move, that meant renovation. Turning home into castle with a new backyard oasis or in-home entertainment room required its own bout of construction and renovation.

All of this resulted in a boom in the housing market as well as rises in the price of raw materials and labor. We all know that an increase in new construction means an increase in new construction-defect claims.

So how do these socio-economic and health issues translate to a litigation problem? What goes up likely comes down. That has not yet been the case with the housing market, but it is inevitable. Prices paid for suburban and resort properties have been well over historical values, and, in some cases, the prices are reaching record numbers. Likewise those who opted for renovation over relocation have had cash outlays also at a premium. Businesses, too, may have participated in the renovation revolution to make their spaces more open and able to accommodate patrons during the pandemic or in preparation for potential health crises down the road.

Generally, the more one pays for something, the more they expect of it. As our lives begin to return to a version of normal where we spend less time in isolation, the premiums paid for remote sanctuary may hold less value. In turn, folks who paid a premium for these refuges and experiences may grow critical of any deficiencies.

In addition to an uptick in construction-defect litigation, both in new construction and home renovation, we may see an increase in construction contract disputes. These contract disputes may involve the construction projects themselves, unforeseen changes in material and labor costs, unforeseen delays in obtaining materials, and even the nature of the goods or property sold. Home purchasers who paid record prices for their properties may look not only to developers, but also, in the case of re-sales, prior owners to make good on perceived or actual deficiencies. It is important to recognize the difference between a construction-defect case and a case of buyer’s remorse.

We may see an increase in fraud claims both in the context of a claim that is or may be fraudulent, as well as claims by buyers against sellers for fraudulent concealment or misrepresentation. Red flags will include kitchen-sink type claims or claims that seem to center more on the buyers’ personal financial crisis than any defect in the home or property.  It is important to propound detailed discovery to flush out the true motivating factors in bringing the suit. 

Likewise, with the aid of an expert, you should ferret out those areas of genuine dispute and potential exposure to your client versus those extra issues added to beef up the claim. Factors to consider in addition to the above include geographic location—including whether the area has been the subject of recent population increase and market price increase; recent home sales, such as those purchased during the pandemic; and whether the claimant relocated from a larger market. Look for emotional cues such as tones and reactions visible in e-mails and early correspondence, as well as whether the project ended up significantly over-budget due to labor and material supply issues.

Additional defenses may include betterment or unreasonable upgrades, and dramatic and uncontrolled increases in material costs that are not in conflict with the terms of the contract. Repairing versus replacement and the doctrine of economic waste should be considered when looking at the claimant’s proposed remedy. Do not forget to look for reduction for depreciation. Repair costs too may be higher than typical in the post-pandemic market although some material costs are starting to level off.

As with any claim or suit, investigation is key. Some additional areas of inquiry include looking at recent property transactions and the history of the property issue, the type of the project and volatile market conditions.

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About The Authors
Multiple Contributors
Jeanine D. Clark

Jeanine D. Clark, Esq., is a partner with CLM Member Firm Margolis Edelstein. She can be reached at jclark@margolisedelstein.com

Lisa Reyes

Lisa Reyes is senior claims specialist at Vela Insurance Services. lreyes@vela-ins.com

Philip Salamone

Philip Salamone is the vice president of claims for PMA Management Corp. and PMA Management Corp. of New England.philip_salamone@pmagroup.com

Amanda Machecek

Amanda Machecek is a partner at KSLN.  almachacek@kslnlaw.com

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