Arizona Legislature Further Limits Scope of Indemnification Provisions Relating to Certain Residential Construction Projects

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Many construction contracts contain indemnification provisions.  Generally speaking, these provisions attempt to shift the risk of certain potential losses between the parties.  Among other things, indemnification provisions can address the manner in which parties allocate the risks of losses, costs, and expenses resulting from:  (a) bodily injury; (b) property damage; (c) lien claims; (d) hazardous materials; and (e) copyright or patent infringements.

Like many other states, Arizona has long had a statute on the books that limits the parties’ ability to shift particular risks through indemnification provisions in a construction setting.  Specifically (as explained in this post from 2016), A.R.S. § 32-1159(A) provides that indemnification provisions “that purport to indemnify, to hold harmless or to defend the promisee from or against liability for loss or damage resulting from the sole negligence of the promisee or the promisee’s agents, employees or indemnity [are] against the public policy of this state and [are] void” in all private construction contracts and architect-engineer professional services contracts. (Emphasis added). read more

“An umbrella of liability”: Arizona Court of Appeals Sets Aside Industrial Commission Decision for not Evaluating the Liability of Each Contractor in a Workers’ Compensation Claim

Who is responsible for payment of a workers’ compensation claim arising from framing work that has been subcontracted at least 4 times on a residential construction project?  That is the question that Division One of the Arizona Court of Appeals recently tackled in Meno’s Construction, LLC v. Industrial Commission of Arizona, No. 1 CA-IC 18-0041 and 1 CA-IC 18-0042 (Consolidated).  The Court ultimately set aside the Industrial Commission of Arizona’s underlying decision that only two of the relevant subcontractors were responsible.  In doing so, the Court held that the administrative law judge (the “ALJ”) below “did not evaluate the liability of each contractor and subcontractor made party to [the] workers’ compensation claim,” in violation of the “umbrella of liability” concept for statutory employers contemplated by Arizona’s Workers’ Compensation Act. read more

“Preceding 30 days” means “Preceding 30 days” – Arizona Court of Appeals Finds that Prompt Pay Act Only Covers Work Performed Within 30-day Billing Cycle

It is no secret that Arizona’s Prompt Pay Act (the “PPA”) is constructed around a 30-day billing cycle. Indeed, the PPA codified monthly progress billings as the standard payment arrangement on all Arizona construction projects.  It was not, however, the understanding or practice of those in the construction industry that payment applications submitted at the end of a billing cycle were limited to work performed or materials furnished in the preceding 30 days.  But this changed with the Arizona Court of Appeals’ recent decision in SK Builders, Inc. v. Smith.   In SK Builders, the court held that the PPA provision stating that “billing[s] or estimate[s]” be based on “work performed and…materials supplied during the preceding thirty day billing cycle” means that the PPA does not apply to general contractors’ billings or estimates that contain work furnished outside the past 30 days. read more

No Exclusion for You: Arizona Supreme Court Holds that Contractual Liability Exclusion in Homeowner’s Policy did not Relieve Insurer of its Duty to Defend Builder-Vendor

This summer, the Arizona Supreme Court rendered an opinion in Teufel v. American Family Ins. Co., et al., 244 Ariz. 383 (2018) that addresses interesting issues relating to insurance and the nature of the legal obligations owed by builder-vendors to home buyers.  Specifically, the Court examined whether a homeowner’s insurance policy exclusion “for personal liability ‘under any contract or agreement’ relieve[d] an insurer of defending its insured, an alleged builder-vendor, against a claim for negligent excavation brought by the home buyer.”  The Court ultimately held “that the exclusion did not apply to relieve the insure of its duty to defend because the negligence claim [arose] from the common law duty to construct the home as a reasonable builder would.” read more

Not So Fast: Arizona Supreme Court Rolls Back Recent Expansion of Common Law Indemnification Claims

Just over a year ago, I authored a post on the Arizona Court of Appeals decision in Hatch Development, LLC, et al. v. Sol’s Construction Co., Inc., 240 Ariz. 171 (App. 2016), which addressed the concept of common law indemnification.  Just recently, however, the decision in Hatch Development was abrogated by the Arizona Supreme Court’s opinion in KnightBrook Ins. Co., v. Payless Car Rental System, Inc., 243 Ariz. 422 (2018).

The Abrogated Hatch Development Decision

In Hatch Development, homeowners sought indemnification from their contractor for damages suffered by a neighbor due to a defectively installed  sewer system.   The court ultimately ruled in the homeowners’ favor, holding that a common law “duty to indemnify may arise in at least two alternative circumstances:  First, when the party seeking indemnity has ‘extinguished an obligation owed by the party from whom it seeks indemnification,’ or second, when the indemnity defendant is ‘at fault.’”  The court noted that the first circumstance was grounded in Restatement (First) of Restitution § 76.  Conversely, the second circumstance, on which the Court’s decision turned, was predicated on Restatement (First) of Restitution § 78(b)(ii), which provides, in pertinent part, that a party is entitled to indemnification where: (1) he or she makes a payment on an obligation; (2) the obligation arises because of the fault of the indemnity defendant; and (3) the payment is made with the justifiable belief that the obligation was owed. read more