$41M Theater Renovation Sparks Construction, Marketing Disputes

Water damage to a newly restored decorative ceiling, allegations of excessive billing, and more than $5 million in estimated repair and delay costs are among the problems surrounding a $41 million renovation of San Francisco’s historic Castro Theatre. Now, the dispute has expanded to a lawsuit accusing the general contractor of unpaid subcontractor bills and unauthorized use of the theater operator’s venues in its marketing materials, the San Francisco Chronicle reported Aug. 3.

Another Planet claimed that problems with drainage, roofing, and the installation of heating and ventilation equipment allowed water into the building, which damaged its newly restored decorative ceiling. Repairs and project delays were initially estimated to cost more than $5 million, according to the publication.

“This is a strong reminder that construction risk does not just end when the physical work is completed,” said Tyler Pommier, Senior Underwriter, Commercial Insurance, Burns & Wilcox, Chicago, Illinois. “They are allegations at the end of the day, but I think they do illustrate how one project can generate multiple different categories of loss at once.”

This is a strong reminder that construction risk does not just end when the physical work is completed.

The construction and billing disagreements were already in arbitration, while the new lawsuit mainly focused on marketing and unpaid subcontractor claims, the Chronicle reported. For contractors overseeing complex projects, Construction Insurance policies including Contractors Professional Liability Insurance can help address risks involving negligent project management and supervision, while Media Liability Insurance could respond to advertising-related claims.

Reviewing coverage before work begins can help identify gaps while there is still time to address them, said Connor Cahill, Broker, Professional Liability, Burns & Wilcox, Minneapolis, Minnesota. “It is important to have these conversations before they become an issue,” he said. “It is a lot harder to get these things added to a policy after something bad happens.”

How insurance may respond to construction defects

The Castro Theatre lawsuit alleged that water intrusion damaged the decorative ceiling, with portions of the ceiling material falling onto the balcony, according to the Chronicle. When contractors face allegations of faulty work, legal expenses are often substantial, Pommier said.

“The main thing upfront, outside of actual damage to work, is litigation expenses,” he said, adding that lawsuits are a significant risk in today’s “highly litigious” society. “These court costs can balloon from something manageable to something pretty unreasonable quickly.”

These court costs can balloon from something manageable to something pretty unreasonable quickly.

While Commercial General Liability (CGL) Insurance can help cover legal defense costs and damages arising from third-party bodily injury or property damage caused by a contractor’s operations, Contractors Professional Liability Insurance, also known as Contractors Errors & Omissions (E&O) Insurance, can address professional errors, including negligent project management and supervision. Coverage for replacing faulty work depends on policy terms, Pommier said.

“A lot of times, contractors do not realize that their insurance policy is not a performance bond or a warranty on their work,” he said. “Just because you have a CGL policy does not mean that you are good to go in every aspect.”

Although a general contractor’s Professional Liability Insurance typically excludes faulty workmanship, coverage may be available for negligent hiring or supervision of the subcontractor responsible for that work, Cahill explained.

“If the general contractor did not do their due diligence and brought on an HVAC contractor with past issues and/or did not monitor the work as it was being completed, that could technically be covered under a Contractor’s E&O policy for the general contractor,” he said. “The general contractor is responsible for keeping the project on time and under budget, and hiring, firing, and supervising any subcontractors they bring on. The overall supervision of the project is their professional service.”

If the general contractor did not do their due diligence and brought on an HVAC contractor with past issues and/or did not monitor the work as it was being completed, that could technically be covered under a Contractor’s E&O policy for the general contractor.

Managing subcontractor and project risks

Other recent cases illustrate the financial stakes of construction disputes. In Washington state, Design West Architects agreed to pay $1.85 million to settle claims involving the construction of Groff Elementary School, the Tri-Cities Area Journal of Business reported in July. In Oklahoma, SouthernTech recently sued a contractor, architect, and engineer over alleged construction defects that left its $12 million aviation training facility “unusable,” KXII reported in March.

When problems are identified during a construction project, some Contractors E&O Insurance policies offer Rectification Coverage that can help pay for corrective work before the issue leads to a claim, Cahill said.

“If during the construction process the contractor realizes there is actually a flaw in the design that they are using, or some of the work was not done to spec, they can preemptively change and correct issues before the project is done,” he said. “It is money spent to prevent a claim from arising down the road.”

Preventing problems also requires careful project oversight, including verifying subcontractors’ insurance and reviewing requirements for being named as an additional insured. Quality controls and water intrusion prevention measures are also key. “The risk management aspect is just as important as the insurance aspect,” Pommier noted.

Contractors E&O Insurance policies may also include contract review services, Cahill said.

“No single policy is going to automatically respond to every aspect of a dispute like this,” Pommier said, referencing the Castro Theatre lawsuit. “The language is going to have to be reviewed instead of assuming my General Liability Insurance is going to cover everything.”

Reducing marketing and reputation risks

In its lawsuit, Another Planet claimed that the contractor’s website featured other venues under the operator’s management, potentially giving customers the false impression that the company endorsed the contractor, according to the Chronicle. While some Castro Theatre promotional material was removed after cease-and-desist letters, pages featuring other Another Planet-operated venues reportedly remained online.

According to Pommier, contractors should obtain written permission before using a client’s name or trademark in their promotional materials. “You cannot just assume you are OK to post somebody’s business on your page without getting their consent to do so first,” he said.

Contractors should also review whether coverage for media and advertising claims is available through their Contractors E&O Insurance, Cahill said. Businesses seeking additional protection may benefit from a separate Media Liability Insurance policy. Reputation Protection Coverage may also be available to help pay for public relations assistance following negative media attention, he said.

“If the insured’s Contractors E&O form included a crisis management extension, they could use some of the policy limits to cover the cost of hiring somebody to help them navigate the social backlash,” he said. “The policy can provide coverage to work with a PR firm to help mitigate that.”

There is a lot that we can do on these policies to tailor it to exactly what the insured is looking for, but it is easier to do so before there is an issue.

Contractors should review these options with a specialized Construction Insurance broker, Cahill said. “There is a lot that we can do on these policies to tailor it to exactly what the insured is looking for,” he said, “but it is easier to do so before there is an issue.”