ForeclosuresMass - ForeclosuresMass Monthly - Legal Spotlight - How to Keep Yourself from Being Part of a Third Party Claim (February 2008)

As a real estate investor, you're regularly creating legal relationships with other parties such as buyers, sellers, building contractors or subcontractors and other service providers. From time-to-time, you may find yourself embroiled in a legal dispute with one or more of these parties.

While many types of third-party claims can arise, we'll focus on three specific areas: disputes involving contractors, insurance issues, and claims between buyers and sellers of real estate.

When hiring contractors or sub-contractors for projects on properties you own, you'll want to keep in mind the types of disputes that can arise, including delay claims, the contract itself, and indemnification.

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Delay claims - When planning out a project, you probably make assumptions about things you expect to happen in the future, for example, obtaining required municipal approvals, completion of preliminary work such as demolition, rough carpentry, etc.

When these assumptions turn out to be incorrect, problems can arise. While contractors will often be flexible in rearranging their schedules, sometimes they are unwilling or unable to do so, and litigation can result. Accordingly, you should be as accurate as possible when determining when the project will be ready for your contractor.

Contracts - To minimize the chance that a dispute will arise regarding the scope of an agreement, make sure you specify key contract terms, such as the work to be done, the completion-date and the price, in writing. The contract should also include "change orders," which alter the scope of work.

Should any issues arise during the work (no-show contractors, shoddy work, etc.), point these problems out to the contractor as soon as possible and confirm everything in writing. Your objective here is not to be confrontational, but to simply document things in an unemotional and factual manner.

Indemnification - Construction contracts often include indemnification language, which has the effect of shifting liability for certain risks from one party to another.

Within the construction industry, indemnification provisions are quite common, with contractors typically agreeing in their contracts to indemnify owners and subcontractors agreeing in their subcontracts to indemnify general contractors for certain risks. As a property owner, you can insist on indemnification language from your contractors, and in most instances your contractors will agree to it.

Indemnification provisions are enforceable in Massachusetts so long as they comply with the applicable statute. Before agreeing to any type of indemnification, and before signing the dotted line on any contract, consult with your real estate attorney.

Generally speaking, liability insurance covers claims for certain types of bodily injury and property damage resulting from negligent acts or omissions. If you're rehabilitating distressed properties, you'll want to require your contractors to submit certificates of insurance to prove that they have adequate liability insurance.

You can also take it a step further by asking for copies of their insurance policies to make sure that key coverage for injuries to their own employees or the employees of their subcontractors has not been excluded under their liability policies. Why? More liability insurers seem to be excluding coverage for relatively common occurrences.

When this happens, you may find yourself with a valid - but worthless - indemnification provision which shifts risks onto an insolvent contractor whose insurer refuses to cover the claims.

If somebody makes a claim against you, report it to your insurance agent right away, regardless of whether you think the claim is covered under your liability insurance policy. Most of the time, your insurance company will accept the claim and assign an attorney to defend you.

Sometimes, however, your insurance company will issue a coverage denial or will respond by issuing a "reservation of rights" letter, essentially telling you that some of the claims are covered and some are not. Whenever your insurance company issues a coverage denial or a reservation of rights, this means that a conflict has arisen between you and your insurance company.

In this scenario, consult independent counsel (i.e. someone other than the attorney assigned to your case by the insurance company) to review the insurance company's decision. A knowledgeable and experienced insurance coverage attorney may be able to convince the insurance company to limit or even withdraw its reservation of rights, or in the case of a coverage denial, convince the insurance company to pay for your defense and cover the claim.

Finally, in the event that you must resort to legal action against a contractor due to the contractor's shoddy work, select an attorney to represent you who understands not only construction issues, but also the insurance implications. Ideally, your attorney will be able to use his or her knowledge of insurance law to trigger insurance coverage under your contractor's insurance policy.

Another type of claim that sometimes arises in the real estate context involves allegations of misrepresentation by a seller of real estate. "Misrepresentation" is a specific legal term, and not every disappointed buyer has a valid misrepresentation claim against the seller. Nevertheless, issues of misrepresentation do sometimes arise and it is important to bear this in mind as you proceed in your business dealings.

If you are the seller, it is important to understand that your representations about a property to potential buyers may have legal significance later on. Although it does not happen often, a seller's representations can be taken out of context to create the basis for a subsequent lawsuit. As a seller, you do not want to find yourself in a situation where your primary defense to a lawsuit is that "we all knew at the time of the closing that this was just an estimate" or "we all knew back then that subdividing was totally out of question" -- but the written documentation suggests otherwise.

Again, if you become involved in this type of dispute, seek out an attorney that specializes in litigation and who has a background in dealing with the issues particular to your case.

In summary, third-party claims occur between contractors and property owners and between buyers and sellers. Insurance issues often come into play in these disputes as well. Getting an attorney involved to review contracts before they are signed can improve your chances of avoiding a dispute.

John B DiSciullo is an attorney specializing in litigation and has handled lawsuits involving the purchase and sale of real property, construction disputes between owners and contractors, insurance disputes, and other related matters. He is licensed in Massachusetts and be reached by phone at (617) 737-8393 or by email at jdisciullo@mitchelldesimone.com.