Don’t Cross The Line With Deposition Witnesses

Shari L. Klevens and Alanna Clair | Mondaq | October 4, 2018

Here are some tips for avoiding ethical issues and the possibility of sanctions in connection with depositions.

Most experienced litigators have at least one horror story of a deposition that went poorly. It usually starts with an opposing attorney with an ax to grind or one that is determined to prove to their client that they are an especially “zealous advocate.” However, attorneys can forget that, although depositions may be held in informal settings, the rules of decorum and professionalism still apply in full force.

Courts will not hesitate to sanction attorneys who engage in conduct during depositions that would never be tolerated in the courtroom. In particular, as reflected by a number of recent decisions in California, courts do not look kindly upon conduct that demonstrates a lack of respect for opposing counsel.

For example, in Claypole v. County of Monterey, No. 14-CV-02730-BLF at *4 (N.D. Cal. Jan. 12, 2016), the U.S. District Court for the Northern District of California sanctioned an attorney for advising opposing counsel that she should not raise her voice because “it’s not becoming of a woman or an attorney who is acting professionally under the rules of professional responsibility.”

While it is perhaps unsurprising that such an obviously sexist remark drew the court’s ire, other courts have imposed sanctions for “snarky” comments that may be somewhat commonplace in heated depositions but nonetheless are viewed by courts as being inconsistent with the level of civility expected from attorneys. In Lucas v. Breg, No. 3:15-CV-00258-BAS-NLS, at *2 (S.D. Cal. May 13, 2016), the U.S. District Court for the Southern District of California sanctioned an attorney for statements to opposing counsel during a deposition such as “shame on you,” “you know, someone apparently didn’t fill you in on who you’re dealing with here,” and “it appears you might be hallucinating by positing the possibility that the defendants are going to win this lawsuit.”

The resulting sanctions for such conduct can be severe and could  include an order requiring payment of opposing counsel’s fees or a monetary fine. For more severe conduct, a bar grievance may be possible. Below are some tips for avoiding ethical issues and the possibility of sanctions in connection with depositions.

Encourage Your Witness to Tell the Truth

A common source for the types of disputes that can lead to sanctions is an attorney’s improper preparation of the witness for the deposition. While preparing the witness for questions that will likely be asked during a deposition is certainly important, most attorneys recognize that “coaching” the witness is inappropriate.

Specifically, preparation that arguably assists the witness in fabricating responses to anticipated questions or implicitly suggests that the witness withhold or alter the truth may violate Rule 3.3 of the California Rules of Professional Conduct. This rule, which will become effective on Nov. 1 as part of the extensive revisions to the California Rules of Professional Conduct, provides that   a “lawyer shall not … offer evidence that the lawyer knows to be false.” Moreover, “if a lawyer, the lawyer’s client, or a witness called by the lawyer, has offered material evidence, and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal,” unless disclosure would violate the lawyer’s duty to maintain confidentiality. The comments further specify that Rule 3.3 applies in ancillary proceedings, such as a deposition.

Accordingly, any coaching that crosses the line to the point where the attorney either advises the client to testify falsely or otherwise fails to dissuade the client from doing so may implicate Rule 3.3, depending on the circumstances.

Pay Attention to The Rules

Although uncivil conduct is generally regarded as wholly inappropriate in every court, jurisdictions can vary regarding whether a host of other conduct is permitted during a deposition. For example, the issue of whether an attorney can confer with the deponent can be a gray area, and some courts refuse to permit such conferences while a question is pending.

For guidance, attorneys can check their rules of civil procedure, local rules, or standing orders to confirm appropriate deposition conduct. For example, one of the most common issues is the use of “speaking objections,” which can be used to coach the deponent on how to answer certain questions or to provide information that essentially amounts to testimony being provided by the defending attorney.

Such objections are generally improper in federal courts, as Federal Rule of Civil Procedure Rule 30(c)(2) provides that “an objection must be stated concisely in a nonargumentative and nonsuggestive manner.” State courts often similarly prohibit objections that go beyond simply stating the basis for the objection.

Another issue that might be addressed in the local rules (and that can lead to disputes) is the circumstances upon which an attorney may instruct the client not to answer a question. The most common basis for an instruction to the client not to answer is where the question seeks privileged information. However, there can be some variation as to other circumstances that may justify an instruction not to answer. For example, in addition to permitting instructions not to answer where privileged information is sought, the Los Angeles Superior Court’s “Guidelines for Civility in Litigation” provide that such an instruction can be made where the question is “manifestly irrelevant or calculated to harass.”

It is also important to remember that, even where an instruction not to answer is based on a privilege claim, the deponent may be required to answer questions relevant to the existence, extent, or waiver of the privilege, such as the date of the communication, who made the statement, to whom and in whose presence the statement was made, other persons to whom the contents of the statement have been disclosed, and the general subject matter of the statement, unless such information itself is privileged.

Even despite rules clearly prohibiting certain conduct at depositions, too many attorneys believe that the rules are merely “suggestions” or that there will be no adverse consequences to pushing the limit. However, as reflected by recent cases, attorneys that flout the rules do so at their own risk.

 

Despite Modern Trend, Ohio Supreme Court Does Not Reconsider Prior Precedent – Finds Inadvertant Defective Work by Subcontractor can Never be a Fortuitous ‘Occurrence’

Clifford Shapiro | Barnes & Thornburg LLP | October 15, 2018

The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the Commercial General Liability (CGL) insurance policy, and is therefore not covered. Ohio Northern University v. Charles Construction Services Inc., Case No. 2017-0514 (2018). In reaching this conclusion, Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.

Ohio Northern University (ONU) hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the University discovered extensive water infiltration and other damage to the building. The University sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors. Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, and then obtained a trial court ruling finding that it had no duty to defend. The Appellate Court reversed, and the Ohio Supreme Court agreed to review the Appellate Court’s decision at Cincinnati’s request.

The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”

The court viewed the issue in Charles Construction to be “nearly identical,” and therefore applied its reasoning in Custom Agri. Using that analysis, the court held that: “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.”

The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those decisions include the Tenth Circuit’s decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”), the New Jersey Supreme Court decision that changed New Jersey law in Cypress Point v. Adria Towers,2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”), and the Iowa Supreme Court decision that changed Iowa law in National Surety Corp. v. Westlake Investments, 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured’s subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)

The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in Custom Agri or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in Custom Agri without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court: “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added: “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”

Contrary to the court’s explanation, its analysis in Custom Agri, and now Charles Construction, actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss not found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes modified the exclusions to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship. In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage can exist for property damage caused the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true where (as in Charles Construction) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.

The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the Charles Construction case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 Custom Agri decision. For more analysis of the important “occurrence” issue, please see the 50 state survey of case law discussing this issue that was prepared by the Barnes & Thornburg Construction Law Practice Group. It can be accessed here.

It’s Rain, Not Flood, Why Isn’t My Water Damage Covered?

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | October 13, 2018

The photos from Hurricane Michael show catastrophic loss from not only the storm surge, up to fourteen feet in some areas, but from winds and rain as well. For those that live far enough inland where surge and flood was not an issue, but still sustained water damage from rain, you may think your homeowners policy will cover you. There is however an exclusion in most policies, commonly called the “wind driven rain exclusion” that insurers will use to disclaim coverage.

The “wind driven rain” exclusion will exclude or limit water damage to the interior of a building unless the wind caused an opening in the envelope of the building, leading to an entry point for the water. Common policy language provides:

We will not pay for any loss that is a consequence of loss or damage as described and limited in this section…The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driving by wind or not, unless the building or structure first sustains damage from a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.

Obviously, you’re not leaving your windows open during a large storm, so you may think it’s obvious that the water entered via damage from a covered cause of loss. The most common denial letter I see for water intrusion, once the above wind driven rain exclusion is cited, is one for lack of maintenance, or faulty workmanship. The insurance companies are agreeing to insure the loss if the building first sustains damage from a covered loss, then states there’s no way the major windstorm caused this damage, this was obviously from an: old roof, roof that had reached its life span, faulting seals/installation/old windows doors, poor workmanship upon original installation of windows/roof/doors, and my favorite—lack of maintenance. These reasons are generally not covered causes of loss under the policy, so the insurer adds these to the denial letter in order to deny coverage via wind driven rain exclusion.

As always, read your policy to know what types of damages you are insured against. If you’re making renovations or repairs to your home, keep records of what was done when, perhaps memorialize with photographs the finished product so if you are ever faced with a denial letter for ‘lack of maintenance’ you can show definitively the property was well maintained. And don’t be afraid to ask your agent what the coverages and exclusions mean in your policy.

General Contractor’s Unjustified Threats to Assess Delay Damages Against Subcontractor are a Material Breach of Contract

Luke Nicholas Eaton | Pepper Hamilton LLP | October 11, 2018

Randy Kinder Excavating, Inc. v. JA Manning Constr. Co. 2018 U.S. App. LEXIS 21878 (8th Cir. Aug. 7, 2018)

This dispute arose from a contract to build a pumping station in Arkansas (the “Project”).  In June of 2010, the U.S. Army Corps of Engineers (“COE”) awarded a contract to Randy Kinder Excavating, Inc. (“Kinder”) to serve as the general contractor on the Project.  Kinder entered into a subcontract with J.A. Manning Construction Co. (“Manning”) to engineer, furnish and install a mechanically stabilized earth (“MSE”) wall at the Project.

The Project experienced significant delays which affected the Manning’s initial start date.  By the time Manning could begin constructing the MSE wall, only six days remained until the original completion date of the entire Project.  Unknown to Manning, however, Kinder was telling the COE that weather and other issues were delaying the Project and Kinder represented to the COE that its projected completion date for MSE wall was in the summer of 2012.  At the same time, Kinder was telling Manning that the MSE wall needed to be completed by November of 2011 and repeatedly threatened to assess delay damages against Manning if this did not occur.  In addition, during the construction of the MSE wall, Kinder and/or the COE demanded that Manning install the wall panels 0.75 inches apart with absolutely no variance, despite industry standard allowing a 0.25 inch variance.  On March 7, 2012, Kinder terminated Manning, at which point Manning had constructed 27.5 feet of the 40-foot MSE wall.  The MSE wall was later completed by a replacement contractor, although the wall as-accepted by the COE contained a number of defects that Kinder and the COE told Manning were unacceptable. 

In October of 2012, Kinder filed suit against Manning, alleging breach of contract and tortious interference.  Manning counterclaimed, allegedly that Kinder had wrongfully terminated the subcontract.  The district court conducted a bench trial, after which it decided the matter in favor of Manning.  Specifically, the district court concluded that: (1) Kinder committed the first material breach of contract by threatening to assess delay-related damages without any justification; (2) Kinder materially breached the contract by wrongfully terminating Manning; and (3) any of the alleged deficiencies in Manning’s work were not material breaches and Manning had substantially performed its obligations.  The district court awarded Manning $215,578.24, which represented Manning’s cost for unpaid labor and materials incurred prior to the date of termination.  Kinder appealed.

Kinder’s primary argument on appeal was that the district court erred in concluding that Kinder committed the first material breach, and instead Kinder argued that the first breach occurred when Manning failed to pay its suppliers for the MSE wall.

The subcontract between Kinder and Manning contained a choice-of-law provision requiring the application of Missouri law.  In Missouri, under the “first to breach” rule, “a party to a contract cannot claim its benefit where he is the first to violate it, [however] only a material breach may excuse the other party’s performance.”   Therefore, in order for Kinder to prevail, it needed to show that Manning committed the first material breach.

To determine whether Manning’s alleged failure in performance was material, the Court analyzed the five factors set out in the Restatement (Second) of Contracts §241.  After reviewing these factors, the Court determined that even assuming that Manning’s failure to pay its suppliers occurred prior to Kinder’s threats, the district court correctly determined that Kinder’s unjustified threats to impose delay-related damages were the first material breach.  Specifically, the Court noted that the evidence suggested that Kinder’s incessant threats were actually the driving force behind Manning’s failure to pay suppliers and that Manning would have paid its supplier’s invoices as soon as it received assurances that it would be paid by Kinder.

Kinder also argued that the district court incorrectly determined that Kinder’s threats were a breach of the contract.  Kinder maintained that such threats were justified because Manning was failing to comply with Kinder’s scheduling demands.  The Court rejected this argument, noting that Kinder’s argument “completely fails to acknowledge  that Manning, through no fault of its own, was prevented from beginning work until more than one year after it was originally supposed to.  It therefore would have been impossible for Manning to perform according to the timelines contained in the early schedules.”  The Court also found that Manning was, in fact, performing in accordance with the timeline contained in the schedule that Kinder sent to the COE, which stated that Manning should be finished with the MSE wall in the summer of 2012.

Critical Issues to a Determination of Coverage and Effective Reservation of Rights

Cheryl D. Shoun | Nexsen Pruet | October 9, 2018

Faced with cross motions for summary judgment in a declaratory judgment action seeking coverage determination, the United States District Court for South Carolina recently employed exacting scrutiny in its analysis of the policies, the reservation of rights letters and the parties’ respective positions. Stoneledge at Lake Keowee Owners Association, Inc. v. Cincinnati Insurance Company and Builders Mutual Insurance Company, 2018 WL 4689135 (September 28, 2018).

Plaintiff, a South Carolina non-profit corporation, manages Stoneledge at Lake Keowee, a horizontal property regime that includes 80 dwelling units. Alleging various construction defects, Plaintiff brought suit against, inter alia, Marick Homes Builders, LLC (“Marick”) and its principal, Rich Thoennes (collectively the “Insureds”), asserting they acted as the general contractor of certain units. Plaintiff also alleged the Insureds, along with IMK Development, LLC (“IMK”) and its principals, placed certain of the units into the stream of commerce. The causes of action included negligence, breach of the implied warranty of habitability, breach of the implied warranty of workmanlike service and breach of fiduciary duty. The case was divided into two separate actions; Phase I and Phase II. Plaintiff secured a verdict in Phase I, following which Plaintiff and the Insureds stipulated the amount of damages due Plaintiff for Phase II, eliminating the necessity of trial. Because Cincinnati Insurance Company (“CIC”) and Builders Mutual (collectively the “Insurers”), had issued commercial general liability (“CGL”) policies to the Insureds, they were parties to the stipulation. Plaintiff and Insurers agreed to proceed with this declaratory judgment action in which Plaintiff sought an order finding the Insurers responsible for payment of damages on Phase I and Phase II. The Insurers sought a determination they were not obligated to provide coverage based upon the standard “your work” exclusion; the policies did not provide coverage for any breach of contract or warranty claims; certain policies did not have coverage to the extent the “property damage” did not occur during the particular policy period as well as other grounds.

1. General South Carolina Insurance Law

As frequently addressed in this forum, insurance policies are subject to the general rules of contract construction. The language of the contract must be given its plain, ordinary and popular meaning. If terms are ambiguous or conflicting, they must be construed liberally in favor of the insured and strictly against the insurer. Despite the requirement of liberal construction in favor of an insured in the event of an ambiguity, the court may not rewrite a policy nor may it grant substantive rights when the meaning of the policy is clear.

2. “Your Work” Exclusion

Standard CGL policies exclude coverage for “property damage” to “your work” arising out of it or any part of it and included in the “products completed operations hazard.”

Here, Marick arrived on the project and completed work performed by a previous contractor. The original work resulted in certain water instruction issues. At trial, Marick was found responsible for Plaintiff’s damages resulting from water intrusion in Phase I. In the instant action, Builders Mutual used Marick’s liability as a basis for its contention that if Marick was found responsible for the Phase I work, that work must have been Marick’s and thus excluded from coverage. Plaintiff conversely alleged the “your work” exclusion did not apply to the water intrusion issues because they resulted from the work of the previous contractor and the damages were therefore covered. Because there was evidence of property damage to work performed by the first contractor before the engagement of Marick, Builders Mutual was not entitled to summary judgment on the “your work” exclusion.

3. Applicable Policy Periods

CIC argued it had no obligation to provide coverage under certain of its policies because they were not effective until after the underlying action began. As to another of its policies, it contested coverage alleging Marick was on notice of Plaintiff’s claims before the commencement of the policy term. While not definitively decided, because there was evidence before the court upon which the factfinder could reasonably conclude the Insureds did not learn “property damage” had occurred or had begun to occur until the commencement of the first policy period, CIC was not entitled to exclude coverage on that basis.

Although CIC’s assertion that the underlying action was initiated after the commencement of its subsequent policies was factually correct, Plaintiff argued and the court agreed, CIC failed to adequately disclose to the Insureds its intention to contend coverage was limited based upon the “known loss” provisions of its policies. Relying on Harleysville, the court concluded CIC did not provide proper notice of its intent to later litigate which policy periods applied nor did it inform the Insureds that a conflict of interest may have existed. Therefore, the court concluded CIC waived the right to contest coverage on the “known loss” exclusions.

4. Breach of Warranty Claims

The Insurers argued they had no duty to provide coverage for any claims “based upon contract” including breach of warranty claims founded upon the Insureds’ failure to replace or repair their defective work. The court agreed with the Insurers’ arguments that repair of faulty workmanship was not covered under the CGL policies. Again, however, relying on the reservation of rights letters, and the Harleysville standard under which such letters are analyzed, the court found the Insurers did not effectively reserve the right to challenge coverage for the claims based upon breach of warranty and repairs for defective construction.

In its reservation of rights letters, Builders Mutual indicated there may be coverage issues and further indicated the Insureds may want to associate their personal attorney, at their expense. Builders Mutual made nothing more than a broad statement that work product was not covered. CIC’s reservation of rights letters referenced several exclusions but failed to explain CIC’s position as to those exclusions. In its analysis of the reservation of rights letters, the court found that none of them adequately advised the Insureds of the need for allocation of covered and non-covered losses or a possible conflict of interest. Further, none of the letters advised of the Insurers’ intent to pursue a declaratory judgment action following an adverse verdict. Thus, the court found the Insurers failed to effectively reserve their rights to challenge coverage for the claims for breach of warranty and repairs.

5. Breach of Fiduciary Duty Claim

Insurers argued the breach of fiduciary duty claim was not covered inasmuch as neither IMK, nor Thoennes, a principal of IMK, were insureds under the applicable policies. This claim was particularly critical to Plaintiff as South Carolina recognizes a claim for breach of fiduciary duty against developers but no such claim has been allowed against contractors. The court made a detailed review of Plaintiffs’ several factual allegations in support of its claims that IMK was the alter ego of Marick and that IMK and Marick should be viewed as amalgamated. Because the record before the court on the cross motions for summary judgment did not include sufficient evidence to determine what rulings, if any, were made in the underlying action as to those theories, the court denied Insurers’ motions for summary judgment, seemingly allowing leave for a second visit of that issue upon supplementation of the record.

6. Allocation Between Covered and Non-Covered Damages

It was clear that at least a portion of the verdict against the Insureds was covered. Consequently, because the Insurers’ exclusions were found ineffective, the entire verdict was subject to the Insurers’ duty to indemnify.

While Builders Mutual’s reservation of rights letters expressly informed Insureds their work product was not covered, it failed to inform that it intended to litigate the damages attributable to non-covered faulty workmanship or dispute coverage as to the breach of warranty and breach of fiduciary duty claims. Further, Builders Mutual failed to inform that a conflict of interest may have existed or that Insureds should protect their interests by requesting an allocated jury verdict. CIC’s reservation of rights letters suffered similar deficiencies. As a result, the Phase II damages were determined to be subject to indemnity.

While the court directed close attention to a number of issues in its examination of the Insurers’ duties, it is clear the Harleysville opinion and the obligations it outlines for insurers, particularly as to reservation of rights letters, was a significant factor in the court’s analysis and resulting decisions. Stoneledge enforces the concept that the broad and general reservation of rights letters of old, with cut and paste references to policies, should be kept in the past. Rather, Stoneledge highlights the importance of thorough, detailed and precise reservation of rights letters, specifically detailing each coverage exclusion the insurer intends to assert and clearly setting forth what it views as obligations of the insured, such as securing a verdict allocating covered as opposed to non-covered damages. This opinion likewise emphasizes the significance of disclosing to an insured the insurer’s intention to pursue a declaratory judgment should it be faced with an adverse verdict.