Virginia Supreme Court Puts Contractor Teaming Agreements on Life Support

Paul R. Hurst, Kendall R. Enyard and Thomas P. Barletta | Steptoe & Johnson LLP | July 17, 2018

Although teaming is not officially dead under Virginia law, teaming agreements typically used by contractors may well be on life support after a recent Virginia Supreme Court decision holding that the post-award provisions of a teaming agreement relating to the award of a subcontract were unenforceable.

In CGI Fed. Inc., v FCi Fed., Inc., Record No. 170617 (Va. S. Ct. June 7, 2018), the Virginia Supreme Court (the Court) affirmed a lower court’s decision to set aside a jury verdict for $12 million in damages arising out of breach of contract and fraudulent inducement claims. The Court determined that the teaming agreement at issue did not create an enforceable obligation to enter into a subcontract with specific terms, but rather included language that expressly conditioned the formation of a subcontract on future events and negotiations and included other terms indicating that the relationship might terminate without the formation of a subcontract. Further, the Court found that CGI Federal, Inc. (CGI) could not recover damages on its fraudulent inducement claim because CGI was not entitled to lost profits under a subcontract in which the final terms were uncertain and unenforceable. The Court also affirmed the lower court’s ruling granting summary judgment in favor of FCi Federal, Inc. (FCi) on CGI’s alternative claim of unjust enrichment.

Background

In 2012, CGI and FCi entered into a teaming agreement to prepare a proposal for a US State Department contract for visa processing that was set aside for small businesses. The decision to form a team arrangement provided benefits to each party – CGI, as a large business, was not eligible to bid on the contract and FCi, although it was small, did not have the capabilities to perform the contract alone. The teaming agreement provided that FCi would submit the proposal as the prime contractor and CGI would be included in the proposal as a subcontractor.

Under the teaming agreement, CGI agreed: (a) that it would not team with or assist any other contractor competing for the visa contract; (b) to furnish personnel, materials, and information necessary to assist FCi in preparing the proposal; and (c) to reasonably cooperate with FCi to ensure the success of the proposal. CGI’s and FCi’s teaming agreement also included provisions relating to a subcontract for CGI if FCi won the prime contract. Those provisions included:

  • A Statement of Work which provided that CGI would receive a workshare of 45% the total contract value, but which also made CGI’s workshare “subject to the final solicitation requirements” for the visa processing contract;
  • An agreement to engage in good faith negotiations to enter into a subcontract subject to applicable laws, regulations, terms of the prime contract and CGI’s best and final proposal to FCi;
  • A provision subjecting the subcontract to various additional conditions, including the “‘[m]utual agreement of the parties to the statement of work, financial terms and reasonable subcontract provisions;’” and
  • A clause providing for the expiration of the teaming agreement if the parties could not agree on terms and conditions for a subcontract within 90 days of the contract award to FCi;

The teaming agreement also provided that each party would bear its own costs, expenses, risks and liabilities arising out of the performance of the teaming agreement, and precluded the recovery of lost profits for a breach of the teaming agreement.

FCi submitted the jointly prepared bid to the State Department on December 6, 2012; however, FCi did not share the proposal with CGI and failed to inform CGI that the proposal allocated only 38% of the workshare to CGI. The State Department identified certain deficiencies in FCi’s proposal and directed FCi to submit a revised proposal. In response, FCi informed CGI additional subcontractors were needed and that CGI’s workshare therefore could not exceed 41%. In exchange for accepting a 41% workshare, CGI requested and FCi agreed to allocate 10 management positions for CGI employees for work on the contract. The parties executed an amended teaming agreement that reflected the agreed upon changes to the workshare percentage and the allocation of 10 management positions to CGI, but did not amend or alter any of the other provisions of the original teaming agreement. However, the day after the parties executed the amended teaming agreement, FCi submitted a revised proposal to the State Department that reflected only a 35% workshare for CGI and reserved all management positions for FCi employees.

On August 2, 2013, the State Department awarded FCi the visa processing contract, but the performance of the contract was delayed due to multiple protests related to FCi’s small business status. To resolve the protests, FCi agreed to give the protester work under the contract which, in turn, reduced CGI’s workshare even more. After FCi’s settlement with the protester, the State Department requested a revised proposal. In its second revised proposal, FCi increased its workshare to 75% and it lowered CGI’s workshare to 18% without CGI’s knowledge.

On March 31, 2014, the State Department finalized FCi’s contract award for a base year contract with four annual renewal options for a total value of $145 million, and FCi and CGI then began negotiations of a subcontract. Initially, FCi offered CGI 18% workshare and subsequently increased the offer to 22% workshare. The parties agreed to a temporary agreement that allowed CGI to perform work on the visa contract under which CGI was paid $2 million. On November 10, 2014, FCi terminated CGI for cause related to a staffing dispute.

The Trial Court’s Decision

On March 25, 2015, CGI initiated a lawsuit against FCi for breach of contract for FCi’s failure to extend a subcontract to CGI with a 41% workshare and 10 management positions for CGI employees, unjust enrichment (which was plead in the alternative to the breach of contract claim) and fraudulent inducement relating to the amended teaming agreement under which CGI sought to recover the lost profits it expected to earn under the subcontract. At the close of evidence, FCi moved to strike on the basis that the post-award provisions of the teaming agreement were unenforceable and that CGI failed to prove its damages on the fraudulent inducement claim. The trial court found that the provision in the teaming agreement that required the parties to enter into a subcontract within 90 days of contract award, limited damages. The court also took FCi’s motion to strike under advisement, but submitted the case to a jury. The jury awarded CGI $11,998,000 for the breach of contract and fraudulent inducement claims.

After holding a hearing on FCi’s motion to strike, the court vacated the jury verdict on CGI’s breach of contract claim and the $12 million award to CGI. On the breach of contract claim, the court found that the teaming agreement was unenforceable because the post-award terms were “aspirational only” as neither party agreed to be bound by the teaming agreement’s post-award provisions related to workshare and management positions until a formal subcontract was negotiated and executed.

The court upheld the jury’s finding that FCi fraudulently induced CGI to enter into the amended teaming agreement. However, it vacated the jury’s award of lost profits because the parties had not agreed to a subcontract within 90 days of contract award to FCi; it went on to hold that CGI therefore was precluded from recovering lost profits beyond the 90 day period and that CGI had failed to prove lost profits during that limited period. The court also granted FCi’s motion for summary judgment on the unjust enrichment claim and entered final judgment for FCi on all claims.

Virginia Supreme Court’s Analysis

On appeal, the Virginia Supreme Court affirmed the trial court’s ruling vacating the jury’s verdict on the breach of contract claim. The Court found that the “amended teaming agreement did not create any enforceable obligation for FCi to extend a subcontract with a 41% workshare and 10 management positions to CGI.” Relying on Navar, Inc. v. Fed. Bus. Couns., 291 Va. 338, 347 (2016) (Steptoe’s Navaradvisory can be found here), the Court found that the amended teaming agreement, read as a whole, did not create any enforceable post-award obligations for FCi to extend work to CGI as a subcontractor and that, at most, the amended teaming agreement imposed a framework for good faith negotiations of a final subcontract.[1]

Specifically, the Court determined that the amended teaming agreement contained several provisions that expressly conditioned the formation of a subcontract on future events and negotiations which, the Court concluded “make clear the parties never agreed to the final terms of a subcontract.” For example, the Court found that the Statement of Work’s provision regarding CGI’s post-award workshare was subject to the final solicitation requirements of the visa processing contract. Similarly, it pointed to the amended teaming agreement’s requirement that parties enter into “good faith negotiations for a subcontract . . . subject to applicable laws, regulations, terms of the prime contract and . . . [CGI’s] best and final proposal to FCi;” and the provision for termination of the teaming agreement if the parties could not reach an agreement on the terms and conditions of a subcontract within 90 days of award of a prime contract as evidence that the parties’ “contemplated [that] a subcontract may not materialize after the prime contract award to FCi and [had] created a mechanism for ending their relationship.” Finally, the Court also stated that just as CGI could not rely on the teaming agreement to get a subcontract from FCi, “FCi could not have relied on the agreement to require CGI to perform work as a subcontractor.”

The Court also found that the trial court correctly vacated the jury’s damages award, but the Court did not concur with the lower court’s ruling that CGI’s fraud damages were limited by the 90-day termination provision in the amended teaming agreement. Instead, the Court held that “lost profits are not recoverable for a fraudulent inducement claim when they are premised on the unenforceable provisions of a contract;” here, the unenforceable post-award provisions of the amended teaming agreement. The Court also noted that CGI proved the existence of its lost profits based on the amounts it would have earned under the subcontract. The Court, however, concluded that because the final terms of the subcontract, including CGI’s workshare, were uncertain (subject to negotiations and contingencies), any damages based on lost profits under the prospective subcontract were therefore also uncertain and not recoverable.

Finally, the Court affirmed the lower court’s entry of summary judgment in favor of FCi on CGI’s unjust enrichment claim under which CGI sought to recover the expenses it incurred in helping FCi prepare the proposal and any profits that FCi realized from performing the work it had promised to CGI. The Court rejected CGI’s claim on the basis that the amended teaming agreement created an enforceable express contract that governed the parties’ relationship in preparing the proposal for the State Department contract. For example, the amended teaming agreement set forth reciprocal obligations related to proposal preparation and negotiation of a subcontract and included provisions that required the parties to bear their own costs of performance and precluded them from recovering lost profits for a breach of the amended teaming agreement. As a result, the Court determined that CGI, as a victim of fraudulent inducement, was entitled to either rescind the contract or affirm the contract and sue for damages. Here, the Court held that CGI was not entitled to recover on its quasi-contract claim because CGI sued for contract and tort damages and therefore, it affirmed the amended teaming agreement and agreed to be bound by its provisions, which expressly barred the recovery of lost profits or expenses incurred to prepare the proposals.

Takeaways and Conclusion

CGI involved a fairly typical contractor teaming agreement – e.g., one that did not expressly provide for the award of a subcontract upon the award of a prime contract, made the award of a subcontract contingent on various future events, and provided for good faith negotiations of a subcontract and for termination of the teaming agreement if the parties failed to successfully negotiate a subcontract.

The Court’s decision essentially holds that such an agreement is unenforceable under Virginia law insofar as a prospective subcontractor seeks breach of contract damages for failure to award a subcontract pursuant to the teaming agreement. Likewise, the prime contractor under a teaming agreement cannot rely on that agreement to compel its teammate to perform as a subcontractor. The Court’s opinion also appears to foreclose recovery of lost profits under a fraudulent inducement claim insofar that claim is based on an unenforceable contract.

On the other hand, the Court’s opinion recognizes that the typical contractor teaming agreement can create an enforceable express contract relating to the preparation a proposal and negotiation of a subcontract. The opinion also leaves open the possibility of a breach of contract action for failure to conduct good faith negotiations for a subcontract. However, the damages potentially recoverable in such an action are uncertain, although B&P costs could be one potential measure. Moreover, assertion of a contract (or tort) claim might preclude recovery under an unjust enrichment theory for failure to engage in good faith negotiations for the award of a subcontract.

CGI was not well served by the teaming agreement with FCi: A jury found that CGI was fraudulently induced to execute the amended teaming agreement; and although CGI continued to assist FCi in proposal preparation, it was then “left at the altar” without a subcontract or a remedy. However, government contractors will continue to use teaming agreements because joining complementary capabilities improves the ability of the team members to obtain contract awards and because many procurements are now “team versus team.”

A typical teaming agreement may be entered into well before the RFP has been issued and at the time of formation issues such as whether the teammate improves the ability to win the award and whether the teammates can work together will predominate over considerations of enforceability. However, the Court’s decisions in CGI and Navar demonstrate that enforceability can be a significant issue if one party seeks to require its teammate to meet certain of its obligations under the teaming agreement or to recover damages for its failure to do so. Given this uncertainty, the companies entering teaming agreements should consider exploring alternative choice of law provisions that are more hospitable to the enforcement of teaming agreements.

They should also consider drafting teaming agreements that are as specific as possible regarding the terms of the anticipated subcontract and that limit or avoid provisions that condition the formation of a subcontract on future events and negotiations. However, accomplishing this can be difficult if the program’s requirements are not known or finalized at the time the parties negotiate the teaming agreement so that it may be difficult to negotiating a teaming agreement early in the pursuit of a contract opportunity that will be fully enforceable in Virginia.

That said, the decision of the US District Court for Eastern District of Virginia in Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F. Supp. 2d 572, 578 (E.D. Va. 2013), aff’d, 549 Fed. Appx. 211 (4th Cir. 2014), may provide some guidance for developing a potentially enforceable teaming agreement. There, the District Court, applying Virginia law, struck down a teaming agreement as an unenforceable agreement to agree where, looking at the agreement as a whole, the Court concluded that the parties did not manifest an intent to be bound by the agreement. In reaching that result the Court cited the several elements of the teaming agreement (similar to those in the FCi/CGI teaming agreement) as evidence that the parties contemplated that a formal subcontract would have to be negotiated and executed and that the future transaction “might not ever come to fruition.” See 939 F. Supp. 2d at 575-75, 581-82. In that regard, the District Court’s interpretation of Virginia law as applied to the teaming agreement at issue was consistent with the Virginia Supreme Court’s decision in CGI. However, in setting out the facts of the case, the District Court noted the teaming agreement at issue was the second of two teaming agreements between the parties relating to contract opportunities with the Office of Personnel Management. Although the first teaming agreement was not at issue in the case and the Court did not otherwise discuss its enforceability, its discussion of that agreement provides an interesting contrast with the second, unenforceable, agreement. In particular, the Court observed that the first teaming agreement:

  • Had several attachments, including (i) a Statement of Work, which “specifically covered provisions including the period of performance, place of performance, the requirement for key personnel, the format of the contract [IDIQ], and project management requirements for the work that Cyberlock would be performing for [the prime contractor],” (see id. at 574), and (ii) “the specific subcontract” that parties intended to enter following award of a prime contract, id. at 574-75;
  • Provided that the prime contractor “‘will . . . enter into the subcontract attached to this Agreement as Exhibit D” within five business days of award of the task order to the prime contractor. id.; and
  • Identified a number of events that would result in its termination, but “none of [them] was the failure of the parties to successfully negotiate a subcontract.” Id.[2]

While provisions such as these do not ensure enforceability, they do address some of the shortcomings in teaming agreements like those in CGINavar and Cyberlock that have been found to be unenforceable under Virginia law.

I Reported My Claim Eight Months Ago! Am I Entitled to Interest Upon Resolution?

Beaujeaux de Lapouyade | Property Insurance Coverage Law Blog | July 20, 2018

This blog follows a telephone conversation I had with an insurance carrier representative who disputed the policyholder’s entitlement to interest under Florida Statute § 627.70131(5)(a).

Insurance carriers have a statutory duty to pay interest on claims after refusing or delaying payment of policy benefits. The statute states:

627.70131. Insurer’s duty to acknowledge communications regarding claims; investigation. –

(5)(a) Within 90 days after an insurer receives notice of an initial, reopened, or supplemental property insurance claim from a policyholder, the insurer shall pay or deny such claim or a portion of the claim unless the failure to pay is caused by factors beyond the control of the insurer which reasonably prevent such payment. Any payment of an initial or supplemental claim or portion of such claim made 90 days after the insurer receives notice of the claim, or made more than 15 days after there are no longer factors beyond the control of the insurer which reasonably prevented such payment, whichever is later, bears interest at the rate set forth in [Fla. Stat. Ann. § 55.03]. Interest begins to accrue from the date the insurer receives notice of the claim. The provisions of this subsection may not be waived, voided, or nullified by the terms of the insurance policy. If there is a right to prejudgment interest, the insured shall select whether to receive prejudgment interest or interest under this subsection. Interest is payable when the claim or portion of the claim is paid. Failure to comply with this subsection constitutes a violation of this code. However, failure to comply with this subsection does not form the sole basis for a private cause of action.1

An insurance company is in a far better position than its insureds to effectuate prompt and fair settlement of insurance claims. Many policyholders suffer through a prolonged claims process experiencing constant delays in communication. Delays in the process often enable the insurer to wrongfully withhold benefits due and owing under the policy. Time is of the essence when the insured depends on payment of policy benefits to properly and promptly repair his or her home following a loss. Fortunately, § 627.70131(5)(a) provides a remedy for policyholders experiencing claim delays or denials.

The statute promotes prompt claim resolution by penalizing the insurance company for non-compliance.2 The date the insurer receives notice of the loss triggers a ninety-day period within which the carrier must investigate and resolve the claim. The insurer is required to pay statutory interest on any payment of benefits beyond the ninety-day investigation period.

Statutory interest is calculated from the date the insurer received notice of the claim using the interest rate found in Florida Statute § 55.03.3 Interest is payable at the same time payment of benefits is made. This incentivizes the insurance company to timely resolve its policyholders’ claims. An insurer’s refusal to pay interest on any payment made after ninety days from the date of notice constitutes a code violation.4

A qualified property insurance professional can assist policyholders in determining entitlement to statutory interest. Statutory interest can provide some relief to those fighting the uphill battle of obtaining wrongfully withheld policy benefits.
_____________________
1 Fla. Stat. § 627.70131(5)(a) (emphasis added).
2 The term “insurer” refers to any residential property insurer. Fla. Stat. § 627.l70131(4); see alsoGreat Lakes Reinsurance (U.K.) PLC v. Branam, 126 So.3d 297, 303 (Fla. 3d DCA 2013) (Florida statute imposing ninety-day time limitation for insurer to pay or deny property insurance claim applies to residential property owners and not marine insurers).
3 Judgment Interest Rates can be found at https://www.myfloridacfo.com/division/aa/vendors/.
4 This requirement is inapplicable if there are factors outside the control of the insurer reasonably preventing such payment. See Fla. Stat. § 627.70131(5)(a).

Blockchain: Mechanics and Magic

Stephen J. Mildenhall | Aon

The Blockchain cures all ails. It is an immutable (unchangeable) and unhackable database. It lowers transaction costs and enables trust between strangers. It unshackles us from authority. It will revolutionize insurance: Executives everywhere must pay attention. Blockchain is the new plastic. Or so the myth goes.

Numerous articles have explained how using a blockchain will lower costs, increase profitability, and produce a clear competitive advantage for insurers. Fewer articles cover blockchain mechanics and magic—yes, it contains some magic. Executives need to have a basic understanding of the mechanics and an appreciation of the magic in order to assess the applicability of blockchains to their insurance business problems. This article will step back from the hype and explain how a blockchain works. It will highlight some surprising capabilities and debunk some confusing myths and inaccuracies.

Blockchain is a Database

A blockchain is a database. Blockchain databases are generally distributed, that is, stored on multiple machines rather than held by a single authority.

Blockchain databases store records that can be thought of as transactions because they have a temporal order: later transactions can depend on earlier ones. The importance of transactional databases to insurance is obvious.

Individual records are stored in blocks that are chained together through an index, hence the name. The data in each block is called the payload. The payload can be structured data, such as details of a financial transaction or an insurance policy, or unstructured data, such as an image, video, or a PDF file of an insurance contract. Each block is given an index that is used to locate it. (SQL databases work this way. Even though data is presented as a table it is stored in indexed blocks.) The chain arises by including the index of the preceding block as part of data payload on each block. Chaining enforces the temporal order of the database. Given the index of the latest block a user can pull out an ordered list of blocks from the database by following the index chain.

Database users have three concerns: does the data have integrity, is the data valid, and is the data secure? Blockchains offer innovative solutions to these three concerns.

Integrity and Hashes

Does an extract from a database faithfully match the original? That is, does it have integrity. Blockchains use hash functions, a magical mathematical construct, to ensure database integrity.

hash function is a deterministic algorithm that will reduce an input of arbitrary length (e.g. the data on a block) to a fixed length output. A familiar example of a hash function is to concatenate the first five letters of your last name (padded if necessary) and the first letter of your first name, a hash beloved of IT departments creating user names. However, as every J. Smith knows, this hash has a problem: many different names can map to the same hash, giving a hash collision. Here’s our first magical ingredient: there exist hash functions where the probability of a hash collision is extremely low. Given two different inputs the probability the hash produces the same output is negligible. Negligible not as-in not in one hundred, but as-in the chances of a collision within one billion messages is less than the probability of picking a particular atom in the universe. The SHA256 algorithm is an example of such a hash function. It produces a 64 digit hexadecimal output, equivalent to a 77 digit decimal number.

How does a blockchain use the SHA256 hash function to ensure integrity? It is surprisingly simple. It uses the hash of the block payload as the index. Remember the payload includes the index of the previous block, as well as whatever data is stored in the block. The integrity of data download from the database is easy to check: hash the payload and compare the answer to the index of the block. If the two match you can be very confident (not quite mathematically certain, but certain enough) your extract matches the original, that is, your copy has integrity. If you know the hash-index of the most recent card in the database you can determine the integrity of a copy of the entire database by recursively computing hashes. One 77 digit decimal number is sufficient to determine if a copy of the entire 184 gigabyte Bitcoin blockchain has integrity!

Validity and Nonces

Database integrity is important, but an accurate copy of invalid data is useless. Users are also concerned their data is valid: that it is legally or officially binding and acceptable. Data validity is usually enforced by a trusted authority such as a bank, employer, insurer, or government agency. The second magical capability of a blockchain is to enable validity without an authority: to enable distributed validation of new database records.

Given a blockchain it is easy to make an invalid copy with integrity: change a block, for example to credit your bank account, and then recompute all the block index hashes. The SHA256 function is very fast to evaluate so this is a quick and easy change. There are now two different copies of the database which both have integrity. Which is valid?

Validity is an incremental problem: given a copy of the database which all users agree is valid, how should the next block of transactions be confirmed and appended? The new block needs to be consistent with the existing transactions and then “locked-in” somehow, so it becomes immutable, or at least very hard to change.

The Bitcoin network enforces validity through a proof-of-work consensus mechanism. The process has several steps. First, a so-called miner checks new transactions to ensure each is valid by looking at the existing database, which provides a record of who owns what. This stage forestalls double-spending because a miner will only allow a Bitcoin to be spent once. The miner knows that others will independently check their work, so cheating will be detected and their mining in vain. Next the miner combines a number of valid transactions into a block payload. Third, the miner computes the hash-index for the block. This is done hashing the payload concatenated with an additional number, called a nonce (number used once). The nonce is selected so that the resulting hash is smaller than a certain threshold (the block difficulty). Bitcoin miners try to find these nonces through brute-force, by trying different nonces until they chance upon one which produces a small enough hash. The brute-force mining process consumes a massive amount of electricity—another popular fact in Bitcoin press coverage! Fourth, the proposed block is transmitted to other users. If they agree it is valid it can be added to the chain and the process starts over. Checking if a block is valid is very quick—once you have been given the nonce. Miners are rewarded with newly created Bitcoins for their mining efforts.

Why does this process create an (almost) immutable record? Suppose I want to change an old block. I can do that but it takes time, the time to find the nonce for each block I want to change. As this time is elapsing, new blocks are being created. Unless I control the majority of the mining computing power (hence: 51 percent attack) I can never catch up with the current block. Thus it is practically impossible for me to go back and alter the blockchain.

Security and Encryption

A distributed database, where everyone has access to all the underlying records, appears inconsistent with good security. Blockchains use encryption to ensure security. The data payloads on each block are public but encrypted. Without a key issued by the owner of the data it is impossible (again, not mathematically impossible, but practically impossible) to extract the underlying information.

Given the purported security of a blockchain why are there so many news reports of Bitcoin hacks and thefts? Encryption is an unbreakable lock—but all locks have a key. For Bitcoin the key is simply a number. And that number must be stored. Steal the number and you control the Bitcoin. All reported blockchain hacks involve the theft of keys, not a breaking of the underlying encryption. If individuals hold their own keys and there are no extensive databases of keys exposed to hackers then mass data breaches cannot occur. Security has been distributed.

Encrypted security technology offers some magical possibilities. It is feasible to issue security keys that allow one-time access to data. And keys that expire. To grant a third party access to check my credit record using a blockchain credit bureau I would issue a one-time, read-only key. The party would access my record at a point in time but would not be able to use the same key twice. Today, of course, I have to reveal my social security number and other sensitive information and to trust the recipient only looks at my record once. There is enormous potential for using blockchain technology to return ownership and control of private information to individuals.

Applications

Commentators often tout blockchains as a solution to the insurance industry’s processing and back-office inefficiencies. But this is a rather narrow view, and one which completely misses its true potential for insurers.

The internet, which has delivered free access to vast troves of information, has paradoxically created a Trust Vacuum. Alleged instances of election hacking highlight the need for identity verification. The Equifax cyber hack reveals the weaknesses of centrally controlled repositories of private information. Blockchain technology allows us to re-democratize data and reassert the individual’s control over their private data. To enable this will require infrastructure and an alternative revenue model. Insurers are well positioned to provide these services and to profit from the Trust Vacuum, stepping in to replace outmoded and insecure centralized networks with distributed blockchain solutions. This revolutionary model represents the true potential of the blockchain for our industry.

7 Ways Technology is Changing Construction

Eric Weisbrot | Construction Law in North Carolina | July 5, 2018

It is difficult to argue that technology is having minimal impact on society as a whole. Not only are digital enhancements making waves on the consumer side of the line, but businesses are feeling the effects as much if not more in recent years. The construction industry is no exception to this technological shift, but the influence the change is having on licensed construction contractors and long-standing businesses is far-reaching. Here are several ways technology is disrupting construction on a day to day basis.

 #1.  Autonomous Equipment.  One of the most notable changes in construction is the addition of autonomous equipment on job sites. Several technology-focused companies are currently testing and perfecting construction machines that require no human interaction to operate. The hope behind this shift is to reduce the impact of the labor shortage in the industry while improving efficiency and productivity on each job.

#2.  Wearable Technology.  Technology is also having an impact on individual workers and how they stay safe and productive each day. Wearable technology, including hard hats, protective eyewear, and gloves are all being developed and rolled out to contractors throughout the country. This digital change offers construction management an easy and efficient way to monitor workers’ production and progress from afar.

#3.  Use of Materials.  Technology is also being used to improve the materials used in building and maintaining structures. The most significant shift in this arena is the use of 3D printing to create materials both on- and off-site, faster and in a more cost-effective way than traditional methods. Carbon fiber through 3D printing allows for the simple production of a variety of materials, including turbine blades, lighting, and pavement.

#4.  Productivity.  Construction sites have seen an influx of drone use as well for a variety of reasons. Drones may be used to identify production issues or monitor progress over time, without the need for the site manager to be physically present. The use of drones in construction has also been touted as a more efficient way to recognize hazards and weather issues that often deter job completion. 

[Editor’s note: there are several legal issues involved with the commercial use of drones.  We have a legal presentation on this topic– if you are in North Carolina and want us to present it to your organization, give me a shout out!]

#5.  Training and Safety.  The use of augmented and virtual reality is also making its way to the construction industry. Both technologies give construction workers a realistic view of a project before it even begins, aiding in creating accurate timelines and budgets. However, more importantly, augmented and virtual reality resources are able to provide a method of training for a higher level of safety on each job site. This has the potential to reduce the total cost of operating a construction project and save lives in the process.

 #6.  Analytics.  Big data is a buzzword throughout the technology landscape, but it does have real implications for construction businesses. The ability to gather data from wearable technology, drones, AR and VR platforms, and even autonomous equipment can be a game changer for site managers. The details included in the data may be used for current and future decision-making, helping construction projects run more efficiently.

 #7.  Running the Business.  Finally, technology in construction is making a significant change in how companies are run. Whether large or small, construction businesses have countless digital tools to help with tasks from accounting and payroll to inventory and timeline management. The technology behind these software platforms is becoming less expensive to create as more companies utilize their power, giving most businesses an opportunity to take advantage.

It may seem like a far-fetched idea to see technology influencing nearly every corner of the construction world, but the reality is this shift has already taken place in a significant way. Construction site managers, large companies, and individual contractors alike can and should jump on the digital bandwagon in ways that best suit their needs in an effort to stay profitable and competitive.

Can Appraisal Take Place Over Property That Has Been Demolished?

Erin Dunnavant | Property Insurance Coverage Law Blog | August 7, 2018

Florida’s Federal Middle District believes it can.1 After Hurricane Irma struck its commercial building in Port Charlotte, Florida, building owners Etcetera, Etc, Inc., filed an insurance claim under their policy with Evanston Insurance Company (“Evanston”). Evanston began its investigation, and as that was underway Charlotte County also inspected the building and issued a “Notice of Unsafe Building” stating the building “was in danger of collapse.”

The County’s notice gave the building owners (“the insureds”) two options: they could either repair or demolish their building. If they chose repairing it, they had to secure all necessary permits and commence the work within 30 days, complying with all applicable building codes. If they opted to demolish the building, they had to secure all permits associated with demolition, including debris removal and complete the demolition within 30 days. If the insureds failed to comply with either option, the County would demolish the building after the 30 days lapsed. The insureds opted to demolish the building.

After receiving a copy of the County’s Notice, Evanston Insurance Company sent a letter to its insureds stating that it did not believe the property needed to be demolished, and that in fact, the County’s notice made it clear that the property could be repaired. Evanston also hired an engineer who agreed the building could be repaired instead of demolished. Evanston further told its insureds that any decision to demolish the property would be voluntary and would not be related to a covered loss. The insureds responded to Evanston acknowledging that although there was some pre-existing damage, Hurricane Irma had caused more damage making it a “total loss.” The letter also notified Evanston that if they wanted to re-inspect the insureds’ building, they needed to do so right away, as the demolition would occur within the next few weeks.

At first, Evanston responded to its insureds by stating it would re-open the claim and schedule a re-inspection to occur. Nonetheless, less than a week before the re-inspection was scheduled, the insureds received correspondence from Evanston Insurance Company that although it acknowledged some covered damage, it was still their position that the property could be repaired (and did not need to be demolished), and for an amount that fell below the windstorm and hail deductible. Accordingly, Evanston did not make payment, but instead told its insureds to submit a repair estimate if it disagreed with Evanston’s position. Instead of awaiting an estimate or continuing to negotiate, Evanston Insurance Company filed a Complaint for Declaratory Judgment against its insureds asking the court to find that,

  • The insured property was not a total loss;
  • Florida’s Valued Policy Law did not apply to the Policy;
  • loss or damage caused by the enforcement of an ordinance or law (1) regulating the construction, use, or repair of any property; or (2) requiring the tearing down of any property, including the cost of removing its debris, was excluded; and
  • liability for the loss was limited to any covered damage caused by Hurricane Irma, subject to the Policy deductible and other terms and conditions.

The Defendant-insureds timely answered the complaint. They also sent a request for appraisal to Evanston. The policy here had an appraisal clause similar to many policies; it stated in pertinent part:

Appraisal

If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction.

Evanston Insurance Company never responded to Defendant-insureds request for appraisal, so the insureds filed a Motion to Compel Appraisal with the court. In determining whether to grant the motion, the court compared situations where insurance carriers deny coverage to those where they acknowledge it,

[While] a dispute regarding a policy’s coverage for a loss is exclusively a judicial question . . . . when an insurer acknowledges that there is a covered loss, any dispute regarding the amount of such loss is appropriate for appraisal. Notably, in evaluating the amount of the loss, an appraiser is necessarily tasked with determining both the extent of covered damage and the amount to be paid for repairs.2

The court found that the question of what repairs are needed to restore a property is a question relating to the amount of loss and not coverage. Evanston acknowledged coverage for the damages relating to Irma, but believed they fell under the deductible, while the insureds believed the damages amounted to a “total loss.” The court found that because both parties agreed there was at least some damage due to a covered cause of loss, the remaining dispute over the scope of damage was appropriate for appraisal.

Evanston Insurance Company argued that the Defendant-insureds waived their right to go to appraisal by demolishing the building, making appraisal impossible. Although there is not much in the way of authority on this issue under Florida law (as the court acknowledged), the court did not find waiver here. The court noted these facts to supports its position:

  • Evanston had inspected the condition of the [insureds’] building 30 days prior to Hurricane Irma;
  • Evanston’s adjusters and engineers inspected again following the hurricane;
  • Evanston was given the opportunity to inspect the building prior to the demolition;

These facts outweighed Evanston’s argument that it would be impossible to appraise the property, especially when reports and estimates generated prior to demolition could be relied upon.

Although Evanston Insurance Company was unsuccessful in fighting off appraisal, the court granted its request to have the appraisal panel prepare a detailed line-itemed appraisal award that should include: 1) the actual cost value of all damages at the property prior to demolition, 2) damages resulting from the enforcement of an ordinance or law regulating construction, use, repair, tear-down or debris removal, 3) the actual cash value of covered damages that existed prior to demolition and are directly attributable to Hurricane Irma, and 4) Damages that predated the policy period, to include damages related to Hurricane Charley.

This is an important case for policyholders because it shows how important cooperating with your insurance company can be. For instance, had the insureds not permitted the initial inspection by the insurance company, the court may have come to a different conclusion, as there may have been insufficient evidence for which to conduct an appraisal without those visits. When in doubt, cooperate with your insurance company. If you aren’t sure what that entails, consult with a public adjuster or an experienced policyholder attorney.
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1 Evanston Ins. Co. v. Etcetera, Etc Inc., 2:18CV103FTM99MRM, 2018 WL 3526672 (M.D. Fla. July 23, 2018).
2 Id. at *3 (citations omitted; emphasis in original).