Colorado Business Litigation Lawyer Blog

In a previous blog, we looked at fire damage to the Georgetown Library and destruction of its contents including expensive artwork and historical documents. In that situation, where the building had been completed, the person suffering the loss (the Georgetown Library and its owner the District of Columbia), sued the general contractor for alleged negligent renovation work by one of the subcontractors. We also discussed how the fire investigators determined the origin and cause of the library fire and how they assigned responsibility based upon code violations.

But, what about a building under construction in the state of Colorado? With construction rapidly taking place all over our state, especially in the Denver area, it is important to understand the relationships among those responsible for the building construction. In most situations, the owner of the building hires a contractor to build or renovate the structure. The contractor then hires subcontractors for distinct portions of the work such as electrical, plumbing, heating, sheet rocking, carpentry, painting and the like. These subcontractors are not agents or employees of the contractor; they are independent subcontractors.

If one of these subs negligently starts a fire that destroys all or part of the building, the owner often will sue the contractor but may also sue the subcontractor for its negligence. The contractor also will usually file a claim against its negligent subcontractor. The contractor’s damages are often its loss of expected profits.

In practice, the owner is usually insured. The insurance company pays the owner for its damages and then becomes “subrogated” to the rights of the owner. This means that the insurance company for the owner steps into the shoes of the owner. The insurance company, having the same claims as the owner, then sues the contractor and subcontractor. A disadvantage of this procedure is that it will often cause considerable delays in construction while the issue of liability/fault is litigated.

This delay of construction is typically avoided when the contract between the owner and the contractor includes a “waiver of subrogation” provision. That contract also contains a provision that all contracts between the contractor and subcontractors must contain a similar “waiver of subrogation” provision. Many times subcontractors are listed as named insureds in the contract between the owner and the contractor. All parties seek protection against endless suits against one another. Under this scenario, the owner’s insurance company pays the owner’s damages and all litigation ends there. This procedure saves time and will not result in significant delay of construction.

One complicating factor is the question of whether or not the waiver of subrogation applies to all damage caused by fire or only to the damage caused to the property which is the subject of the contract between the contractor and the owner. In many states, all fire damage is subject to the waiver of subrogation so that damage to adjoining structures owned by the same owner is subject to waiver of subrogation and the owner’s insurance company is required to pay for all the damage with no subrogation rights.

In other states, including Colorado under a recent court ruling, the owner’s insurer is liable for all the damage caused by the fire only to the building or part thereof which is the subject of the contract. Damage to an adjoining building owned by the same owner is not subject to the waiver of subrogation. Under this scenario, the owner of the adjoining building is permitted to sue the subcontractors as if there were no waiver at all.

One sure source of future litigation is the question of how the work to be performed under the contract is determined. For example, suppose a mechanical system remote from the contract work is damaged because of damage to parts of the system, which makes the entire system itself unusable. Does the recent Colorado court decision mean that the contractor can sue for the damage to the mechanical system, notwithstanding the fact that the mechanical system itself was not a part of the work under the contract? Only time will tell.

Over the years, I have had Colorado general contractor clients ask me what their biggest liability risks are for buildings they build or own. I imagine insurance carriers for those business construction company clients have asked themselves the same thing.

What I have told my clients is that there are many ways to measure a risk or loss. However, if a catastrophe is a loss that can result in total destruction in a matter of minutes, it seems as if the biggest risk would be due to fire, absent a missile strike. It is important to note that I am referring to acts of men, i.e. negligence, not acts of God, i.e. earthquakes and tsunamis.

The National Fire Protection Association (NFPA) provides an overall fire picture for each year. In 2007:
* There were an estimated 1.6 million fires.
* 3,430 civilians were killed and 17,675 civilians were injured
as the result of fire.
* Fires killed more Americans than all natural disasters
combined.
* 84% of all civilian fire deaths occurred in residences.
* An estimated 32,500 intentionally set structure fires resulted in
295 civilian deaths and $733 million in property damage.

Particularly risky are fires occurring in a building where the public is invited. Some of these buildings are office buildings, but others are nightclubs and theaters. In additional to often total destruction of the building in a fire, litigation arising out of fire injuries or deaths can expose general contractors, subcontractors, and vendors to liability in the hundreds of millions of dollars.

The ten deadliest public assembly nightclub fires in U.S. history are:
* Richmond Theater, Richmond, VA, December 26, 1811 – 72 deaths – caused by a kerosene chandelier igniting stage scenery

* Conway's Theater, Brooklyn, NY, December 5, 1876 – 285 deaths – caused by a kerosene lamp igniting a stage curtain

* Iroquois Theater, Chicago, IL, December 30, 1903 – 602 deaths – believed to have been caused by faulty wiring leading to a spotlight

* Rhodes Opera House, Boyertown, PA, January 12, 1908 – 170 deaths – believed to have been caused when someone on stage kicked over a kerosene lamp

Rhodes Opera House, Before and After the Fire 1908

* Rhythm Club dance hall, Natchez, MS, April 23, 1940 – 207 deaths – believed to have been caused when a careless smoker ignited decorative Spanish moss hanging from the ceiling

* Cocoanut Grove nightclub, Boston, MA, November 28, 1942 – 492 deaths – cause is speculative, but after 50 years is believed to have been caused by the ignition of gas from a faulty air conditioner

* Ringling Brothers and Barnum & Bailey circus tent, Hartford, CT, July 6, 1944 – 168 deaths – tent coated with waterproofing consisting of paraffin and gasoline was ignited by an unknown source

* Beverly Hills Supper Club, Southgate, KY, May 28, 1977 – 165 deaths probably caused by faulty aluminum electrical wiring

* Happy Land Social Club, Bronx, NY, March 25, 1990 – 87 deaths – caused by an arsonist using gasoline

* The Station nightclub, W. Warwick, RI, February 20, 2003 – 100 deaths - caused by rock band’s pyrotechnics igniting flammable foam soundproofing lining the walls

After one of these fire disasters, someone is going to be left holding the bag. You can bet your bottom dollar that if the fire insurance company and the building owner are sued, they will be looking around for contribution from others. In a later blog, I will address all of the potential stakeholders for a fire catastrophe. I will also look at the reasons why other stakeholders might be liable for full or partial contribution. My advice to them? Buckle up and make sure you have plenty of your own fire insurance coverage – the ride is going to get bumpy.

As a Colorado general contractor or business construction company who may be at risk should a catastrophic fire event take place, it is important to contact a Colorado Business Litigation attorney who is knowledgeable in this area. I would enjoy the opportunity to speak with you and discuss how I may be able to assist you, and your company.

~Jim Gilbert~

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