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Labor Under the Federal Miller Act: The Known Unknown

by | 25 April 2017 | ,

Here’s what we know. On federal projects, the Miller Act requires prime contractors to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person.” The Act authorizes “every person that furnished labor or material in carrying out work provided for in a contract” who has “a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond.”

Further, we know that the Act is “highly remedial in nature” and “entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” However, while liberally construed in favor of subcontractors, the Miller Act is not without limit.

Beyond notice, timeliness, and venue requirements, which are all necessary elements to state a prima facie claim for relief under the Miller Act, many forget to analyze the obvious: whether the subcontractor performed “labor” within the purview of the Miller Act. Despite the ostensibly inclusive language in the Miller Act requiring a bond for the protection of all persons supplying labor and materials in carrying out the work, several federal courts have imposed limits on the types of work constituting “labor” on construction projects.

Court Enforces Subcontractor’s Demand for Arbitration of General Contractor’s Claim

by | 11 April 2017 | ,

The Court of Appeals recently enforced an arbitration agreement between a contractor and its subcontractor in a dispute involving indemnity and insurance coverage for a claim by subcontractor’s injured worker. (Spence Bros. v Kirby Steel, March 2017). In this case, the general contractor, Spence Brothers, was the project manager overseeing the University of Michigan’s expansion of the Crisler Arena. Spence subcontracted with Kirby Steel to provide structural and metal work. Spence’s letter accepting Kirby’s proposal directed Kirby to list Spence as an additional insured. The parties’ subcontract contained a standard indemnity clause requiring Kirby to defend and indemnify Spence against all losses. The subcontract also required that Kirby’s insurance policy name Spence as a named insured.

Captive Insurance Changes for 2017

by | 4 April 2017 | , ,

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. Proponents and sponsors of captive insurance structures often refer to the tax benefits of I.R.C. Section 831(b), which allows eligible insurance companies to make an election to be taxed only the company’s taxable investment income.

In effect, the 831(b) election allows such insurance companies to collect a set amount of insurance premium without having to pay tax on said premiums. Effective January 1, 2017, insurance companies electing taxation under 831(b) can collect up to $2.2 million in insurance premiums while being taxed only on the taxable income generated from the collection and retention of such premiums.

Captive Insurance Structures Designed for Different Needs, Goals and Funding Abilities

by | 29 March 2017 | , ,

Captive insurance entities can be structured in a variety of ways depending on the participant’s needs, goals, and funding abilities. The following are some of the more common structures that can be used.

Pure Captive
In this model, a captive insurance company is typically a wholly-owned subsidiary of a parent company. These captives are usually closely controlled by the parent company and are generally used by companies that have insurance and risk management needs that are significant enough to justify the financial costs of being solely responsible for the captive’s operational costs. Companies that consider forming a pure captive generally do so to improve risk management and to maximize the benefits of I.R.C. 831(b) election thereby sheltering up to $2.2 million in taxes.

Captive Insurance and Risk Retention

by | 24 February 2017 | , ,

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

Michigan Prevailing Wage Update

by | 15 February 2017 | , ,

Michigan’s prevailing wage law faces potential repeal in 2017. The first three bills proposed by the Michigan Senate are directed at repealing the laws that require labor on Michigan public construction projects be paid at prevailing wage rates akin to union-level wages. This is not the first time this issue has surfaced in Michigan and in other states across the country.

Proponents of repealing prevailing wage contend that requiring higher labor costs is passed through to the taxpayers whereas the opposition claims that prevailing wage results in higher-quality public improvements and a fair wage for the people of Michigan that perform the improvements. The debate over these issues is expected to be heated and continue throughout the year. Check back for additional updates about this issue and the future of Michigan’s prevailing wage legislation on public construction projects.

Court Enforces Subcontractor’s Obligation to Indemnify Contractor

by | 3 February 2017 | , ,

The Michigan Court of Appeals recently affirmed a contractor’s right to defense and indemnity from its subcontractor under the plain language of the parties’ subcontract. Provenzino v Macomb County Department of Roads, et al (January 2017).

In this case, Mr. Provenzino alleged that he was injured when he fell from his motorcycle after encountering a disparity in height between adjacent milled and unmilled lanes of traffic in a construction zone. Provenzino sued multiple parties including Florence Cement Company, the general contractor, and Lois Kay Contracting Company (LKCC), the subcontractor who milled the roadway surfaces. Florence filed a cross claim against LKCC seeking indemnity based upon the indemnification provision in the parties’ subcontract. That provision stated:

Subcontractor agrees, and shall bind all sub-subcontractors to agree to indemnify Contractor, Owner and all other parties the Contractor is obligated to indemnify pursuant to the Prime Contract (hereinafter “Indemnitees”), and to defend and hold Indemnitees forever harmless from and against all suits, actions, legal and administrative proceedings, claims, demands, damages, interest, attorney fees, costs and expenses of whatsoever kind or nature whether arising before or after completion of Subcontractor’s work and in any manner directly or indirectly caused or claimed to be caused by any action or negligence of Subcontractor or Sub-subcontractor, and regardless whether directly or indirectly caused or claimed to be caused in part by a party indemnified hereunder or by anyone acting under their direction, control or on their behalf, until such time as a judgement [sic] is entered against Contractor by a court of law. …[emphasis added].

Improperly Licensed Architect Firm Not Liable On Licensing & Malpractice Claims

by | 2 February 2017 | ,

In Center Street Lofts Condominium Association v AZD Associates, Inc., et al (Mich. Ct. App. Dec. 2016), a condominium association sued an architectural firm, AZD Associates, claiming that AZD’s deficient design of the condominium project caused multiple units to leak. The Association also claimed that AZD was not properly licensed because less than 2/3 of AZD’s principals were licensed architects, contrary to the requirements of the Michigan Occupational Code (MOC).

The trial court dismissed the Association’s claims as to improper licensure, ruling that the Michigan Occupational Code does not give a private person the right to sue an architect to enforce the licensing requirements of the MOC. Instead, the MOC gave enforcement authority only to prosecutors and the Attorney General. The only exception given to private persons is the right to seek an injunction (an order to stop) against an unlicensed practice. The Court of Appeals agreed with the trial court and affirmed dismissal of the claim.

Contractor Loses Bad Faith Argument Against Surety

by | 18 January 2017 | , ,

The Sixth Circuit Court of Appeals recently affirmed that a surety did not act in bad faith when it settled the claim of its principal contractor against the State of Michigan related to disputes on a prison construction project. Great American Ins. Co. v E.L. Bailey & Co., et. al. (November 2016).

In this case, the State hired E.L. Bailey & Company to construct a kitchen in a prison in Ypsilanti. Great American Insurance Company (GAIC) provided performance and payment bonds ensuring Bailey’s performance and payment to subcontractors. In turn, Bailey agreed to indemnify GAIC for payments or expenses GAIC incurred under the bonds and to post sufficient collateral to protect GAIC from claims. The indemnity agreement between Bailey and GAIC also gave GAIC the right to settle on Bailey’s behalf any claim concerning the prison contract.

Disputes arose on the project and Bailey never finished the work. The State and GAIC agreed to have another contractor complete the project. The State withheld payment to Bailey asserting liquidated damages (“LDs”) for Bailey’s failure to timely perform. Bailey disputed the LDs, blaming delays on the State and its architect. The parties sued each other in the Michigan Court of Claims (Lawsuit #1). On the eve of facilitation, GAIC informed Bailey that it had settled Bailey’s claims against the State, with the State agreeing to pay GAIC $358,000 as final payment under the construction contract.

An ADC Construction Classic – The Timeless Gingerbread House

by | 9 January 2017 | ,

You never know what might spark a student’s interest in construction. Such was the case on December 21, 2016, when 10th grade students in the Academy of Design and Construction (ADC) at Grand Rapids Public Schools’ Innovation Central High School enthusiastically embraced their studies in the classic holiday short course favorite – gingerbread house construction. Aileen Leipprandt, an ADC mentor, offers the following account of the students’ successful project.

After spending approximately two minutes in a design charrette guided by Ashley Dunneback (Tower Pinkster), the team broke ground. The first order of business was assembly and installation of the pre-fabricated wall panels (graham crackers). Field fabrication of the panels (snapping the crackers into proper dimensions) proceeded without incident largely due to the pre-scored panels. Attempts to customize panel size by sawing with hand tools (plastic knives) was only marginally successful due to breakage and quickly abandoned. Consistency of the principal fastener (icing) played a crucial role in affixing the panels to the structure (ok, we admit that a shoe box provided well-needed structural support).