Reprinted from May 2006 ohioconstructionlaw.com

These days it seems that hospital administration is synonymous with hospital construction. Take a look at any large hospital campus. It is an amalgamation of different buildings, almost always built in different eras and frequently interconnected, sometimes even built contiguous with one another. Over the years, growth in patient base, availability of new services, and building obsolescence have created exponential growth in finished space for many hospitals.

When considering plans for expansion, a hospital must first answer a series of questions—do we build within the footprint of an existing hospital building? Do we acquire additional improved property? Do we just rehabilitate existing hospital space? Or do we construct on unimproved land?

Three of these options require some degree of demolition, either complete demolition of an existing building or selective demolition of building components. While demolition provides unique technical challenges on each project, it also poses unique contractual and legal issues. These problems are amplified in a health care setting, where patient care must be maintained. The purpose of this column is to explain some of these issues so that both health care administrators and construction professionals have a better understanding of the risks inherent in demolition work in a health care setting.

The Law

Depending on the magnitude of the work, under Ohio common law, building demolition will likely be considered an “inherently dangerous” activity, meaning that the owner of a building cannot avoid direct liability for damages caused by the demolition contractor it employs. That principle dates back at least to Covington and Cincinnati Bridge Co. v. Steinbock & Patrick (1899), 61 Ohio St. 215.

What types of claims are made on demolition projects? In Steinbock, a five-story warehouse damaged by fire was being demolished when part of it fell into an alley, damaging the building across the alley and injuring its owner. In Amurri v. City of Columbus (Franklin Cty.), 1985 Ohio App. LEXIS 5793, the City hired a contractor to demolish a hotel that had been declared a public nuisance. In the course of the demolition, a wall collapsed onto an adjacent building, creating damage and causing the tenants to sue the City.

Concerns are amplified in a health care setting because of the presence of patients, hospital staff, visitors, neighbors, and passers by. Each of these groups can include hundreds if not thousands of potential claimants every day on a large project.

Contractual Strategies

Owners have two primary contract tools for managing the inherent risks of demolition activity: indemnification and insurance. As discussed in several previous columns, indemnification is a powerful risk-shifting tool in a contract. Even a narrow indemnification clause such as Section 3.18 of the American Institute of Architects Document A201-1997, General Conditions of the Contract for Construction, requires the contractor to reimburse the owner for all “claims, damages, losses and expenses” arising from bodily injury or damage to property caused by the contractor’s conduct.

But why place all that financial liability on a contractor who could become judgment proof through bankruptcy or other factors, making the owner solely responsible for any judgment under the “non-delegable duty” doctrine from Steinbock? In this case (and every case), the owner usually can protect itself by requiring the contractor to carry the necessary insurance in its construction contract.

Any health care owner contemplating a construction project that entails demolition needs to take the time to consult with its liability insurance carrier and legal counsel to determine the best amount and types of insurance coverage to be required of the contractor. While one size does not fit all when it comes to liability insurance, the owner nearly always will want the contractor to obtain and maintain a contractual liability coverage under the contractor’s CGL policy. Subject to certain important restrictions, the contractual liability coverage provides insurance coverage for the contractor’s indemnification obligations.

Coverage limits will likely change from project to project, depending on the dollar value of the work and the particular risks involved. Simply gutting office space does not require the same amount of insurance as a whole building implosion in a developed neighborhood.

The technical specifications portion of a contract provides another opportunity to minimize an owner’s risk. It can mandate discrete performance requirements for the contractor so that the owner can maintain specific hospital services or standards of care during demolition. The indemnification provisions of the contract can then be broadened beyond actual injury to include disruption of services, so that if a certain service is disrupted, the indemnification applies to the economic impact.

Other Strategies

Owners have an additional tool for minimizing risk in demolition projects—investigating and hiring qualified demolition contractors. The court in Amurri was critical of the City of Columbus for its failure to determine that its contractor was not especially experienced or qualified for the type of demolition involved. (The contractor tried to bring down a six-story building by removing a support column on the first floor, instead of working from the top down.)

Public hospital owners, whether letting contracts under the “lowest and best” or “lowest and most responsible” standard, can craft a competitive bidding process to help ensure that only a qualified demolition contractor gets the work. Experience in the unique area of hospital work can be made a prerequisite for awarding a contract. Private hospital owners have even more flexibility.