Recent Court Order Excluding Expert Testimony Offers Useful Reminders and Lessons for Construction Litigants

Amandeep S. Kahlon | Bradley Arant Boult Cummings

Construction claims often feature supporting testimony from design and/or scheduling experts, and exclusion of that testimony either by disqualification of the expert or a finding that the testimony is otherwise inadmissible can prove fatal to your claim or defense. States may vary in their requirements for admissibility of expert evidence, but most states follow some variant of Federal Rule of Evidence 702. Rule 702 provides that an expert may testify in the form of an opinion or otherwise if:

(a) The expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) The testimony is based on sufficient facts or data;
(c) The testimony is the product of reliable principles and methods; and
(d) The expert has reliably applied the principles and methods to the facts of the case.

The recent district court order in American Contractors Indemnity Co. v. Reflectech, Inc. granting a motion to strike an expert demonstrates the importance of satisfying the requirements for admission of expert evidence under Rule 702 and other like statutes. In that case, a surety sought indemnity for payment on bonds issued to a subcontractor that defaulted on a roofing subcontract. The surety investigated the general contractor’s claim for default against the subcontractor, settled with the general contractor for approximately $400,000, and then filed suit against the subcontractor for breach of their general indemnity agreement.

The defendant subcontractor proffered an expert to opine on the adequacy of the surety’s investigation and the appropriateness of payment of the general contractor’s bond claims. In moving to strike this expert, the surety argued (1) the expert should be disqualified due to lack of experience, and (2) the expert testimony was inadmissible because it was not based on sufficient facts or data as required under Rule 702(b). The court focused on the second prong of the surety’s argument in granting the motion to strike.  The court found that the expert’s opinion was not based on sufficient facts or data because of several admissions from the expert during his deposition. Specifically, the surety persuaded the court with the following facts derived from the expert’s deposition testimony:

  • The expert admitted he never visited the project site and interviewed only one individual, the owner of the subcontractor, before drafting his expert report;
  • The expert admitted he never reviewed the surety’s records regarding the general contractor’s claim and did not know what information the surety’s investigation uncovered because that information was never provided to him;
  • The expert testified that the surety’s records would have been helpful in forming his expert opinion (the subcontractor was unable to provide any explanation for failure to provide this material to the expert when it had been produced by the surety); and
  • The expert stated that he did not review the settlement portion of the general indemnity agreement, which he had opined was unconscionable.

The facts relied upon by the court highlight the importance of selecting and managing experts in construction disputes. When selecting an expert, a party should be mindful of the expert’s prior testifying experience and his or her approach to investigating a claim or subject area for which an opinion is required. A party should also ensure its expert receives and reviews all the documents and information necessary to formulate his or her opinion. To be successful, this process requires an active dialogue with the expert throughout the course of a matter.  For example, document productions from other parties and deposition testimony from witnesses will uncover additional information an expert may need to support his or her opinions. Consistent engagement with an expert will help avoid outcomes such as that encountered by the roofing subcontractor in this case and should help a party better develop its claims or defenses as a matter proceeds.

Your CGL Policy May Cover More Than You Think – Damages “because of’ Property Damage or Bodily Injury for Construction Projects

Stella Szantova Giordano | Saxe Doernberger & Vita

Construction projects are susceptible to injuries and property damage – which is why the stakeholders involved rely heavily on commercial general liability (“CGL”) insurance policies when such losses occur. While many insureds are familiar with pursuing insurance coverage for bodily injury and property damage, a CGL policy can also cover certain consequential damages if they can be characterized as damages “because of” property damage or bodily injury.

Imagine the following scenario: An employee falls from scaffolding at the project site. OSHA shuts down the site for investigation of safety issues, and no trades are allowed to return to work for a month. Because of this, the project schedule falls behind, and the owner and the GC suffer extensive delay damages. The question is: can these (and similar) consequential damages be covered as “because of” damages under a CGL policy.

How does “because of” coverage work?

The key language to access the “because of” damages coverage is in the insuring agreement of every CGL policy written on the post-1973 ISO coverage form CG 00 01. Section I.A(1) reads:

(a) We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.2

Because the highlighted phrase can be interpreted very broadly, many courts have concluded that a CGL policy covers certain damages flowing from a bodily injury and property damage if the following is true: 1) there is a bodily injury or property damage for which the CGL policy provides coverage; 2) the sought damages were incurred “because of” such bodily injury or property damage; and 3) the connection between the bodily injury or property damage and the “because of” damages sought is not too attenuated.3

As for the third element, any degree of “but for” causation can be construed to provide coverage, since “because of” damages can (and very often are) far broader than property damage or bodily injury itself. Exactly how closely related the losses for which coverage is sought must be related to the underlying bodily injury or property damage will vary from case to case, but a good rule of thumb is the closer related to the underlying bodily injury or property damage, the better.

What types of damages can be covered?

Theoretically, any damages which can be described as damages “because of” bodily injury or property damage could be covered. However, case law on this type of coverage is limited so a creative argument, matching your particular circumstances, may be needed. Courts found “because of” coverage for these types of damages stemming from underlying property damage: 1) delay costs (California, Illinois, Michigan, Texas, Washington and Wisconsin); 2) liquidated damages (Texas and Pennsylvania); and 3) diminution of value (Missouri and Texas).

Delay Costs. If construction is halted and delayed “because of” property damage, associated costs can be very expensive. Examples of covered losses include: a 131-day delay in completion of a California residential project because of water intrusion property damage4; and delay costs associated with re-engineering and rip-and-tear damages stemming from a subcontractor’s failure to construct concrete piles to their required strength in Washington.5

Liquidated Damages. Because liquidated damages are considered to be contract-based, obtaining coverage for them under the “because of” theory can be more difficult. The key distinction is whether the damages are a result of the insured’s negligence (in which case they are covered), or whether the damages arise from a contractual obligation (in which case they are not). A federal court applying Texas law allowed coverage for liquidated damages of $5,400 per day resulting from damage to an oil pipeline.6 A court in Pennsylvania found that liquidated damages “because of” a subcontractor accidentally cutting structural parts of a bridge were covered.7 Finally, a Tennessee court explained that if the insurers wanted to protect themselves from coverage for liquidated damages as “because of” damages, they could specifically endorse their policies to exclude liquidated damages.8

Diminution of Value. In and of itself, diminution in value is a purely economic loss not considered property damage. However, if it stems from underlying property damage, “because of” coverage is available. One court, applying Missouri law, allowed “because of” coverage to a supermarket for diminution in value to its building because of improperly installed and cracking terrazzo floor.9 Another court in Texas allowed coverage for diminution in value caused by water leakage from developer-made lakes to individual homes.10

NOTE: Many states also allow coverage for ensuing damage arising out of defective construction. While some cases characterize this as “because of” coverage, seeking defective construction coverage usually involves a different analysis which is beyond the scope of this article.11

Damages “because of” bodily inury may be more limited

Very few cases address coverage for consequential damages “because of” bodily injury on a construction project, but the argument should be the same as with damages flowing from property damage. One notable New York case allowed “because of” damages coverage for a project owner whose employees slipped and fell on water which came from an improperly installed (and leaking) roof.12 In addition, cases from non-construction settings can be used as guidance when seeking damages “because of” bodily injury. For example, a Maryland case allowed compensatory damages (including purchase of a cell phone head set) to individuals injured by cell phones emitting dangerous levels of radiation.13 In any case, the argument that damages “because of” bodily injury (such as the delay costs in the hypothetical scenario mentioned earlier) should be covered by a CGL policy is often worth making.

Conclusion

If you find yourself faced with consequential damages on a construction project caused by property damage or bodily injury, you should consider whether the “because of” argument could get you additional recovery under a CGL policy. Coverage counsel can help you evaluate whether damages such as delay in completion, repair costs, liquidated damages or diminution in value could be covered.

General Contractors: The Payment Provisions in Your Subcontracts May Have Just Been Determined to be Unenforceable

Scott Halberstadt | TALG

While it has been more than twenty years since the California Supreme Court determined, in Wm. R. Clarke Corp. v. Safeco Ins. Co., that “pay-if-paid” provisions in subcontracts were unenforceable, following a recent decision from the Court of Appeal, Fourth Appellate District, general contractors, or any other contractors that contract directly with owners, should review their subcontracts to confirm that they do not contain potentially unenforceable “pay-when-paid” provisions.

Following the California Supreme Court’s Wm. R. Clarke decision, many direct contractors (defined by California Civil Code § 8018 as a contractor with a direct contractual relationship with an owner) revised the payment provisions in their subcontracts from “pay-if-paid” (where payment by the owner is a condition precedent for payments to the subcontractor) to “pay-when-paid” (requiring the contractor to pay the subcontractors within a defined period after payment by the owner). In the recent Crosno Construction Inc. v. Travelers Casualty and Surety Company of America decision, the Fourth District Court of Appeal determined that such “pay-when-paid” provisions may be unenforceable if they run afoul of California’s statutory waiver and release statutes (California Civil Code § 8120 et seq.).

In Crosno, the subcontract required the direct contractor to pay its subcontractor in monthly progress payments with the following “pay-when-paid” provision should the owner’s payment be delayed:

If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.

While the Crosno court did not appear to question the enforceability of most of this provision, the Court of Appeal determined that the portion of the provision which allowed the direct contractor to delay payment until the conclusion of its mechanics’ lien remedies was unenforceable. The Crosno court’s rationale was that this portion of the “pay-when-paid” provision postponed the direct contractor’s obligation to pay for an indefinite period of time and was, therefore, violative of California Civil Code § 8122’s bar against contractual provisions which “waive, affect or impair” a claimant’s waiver and release rights.

As pointed out by the Crosno court, California law lays out a comprehensive statutory scheme to resolve payment disputes in construction projects (California Civil Code § 8160 et seq. for private projects and California Civil Code § 9000 et seq. for public projects). This statutory scheme is intended to carefully protect against unfair or imprudent waiver of right to payment and a claimant may only waive its statutory remedies by signing one of the four types of statutorily required written waiver and releases (California Civil Code §§ 8132 – 8138). In fact, California Civil Code § 8122 makes any contractual provision purporting to modify the statutory waiver and release scheme unenforceable.

The Crosno court determined that the “but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies” portion of the “pay-when-paid” provision in the subcontract violated California Civil Code § 8122 and, thereby, made the provision, as a whole, unenforceable as a matter of law.

Like Wm. R. Clarke, the Crosno case involved a subcontractor’s claims against the direct contractor’s payment bond. Likely, the offending language in the contract (“but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies”) was intended to limit claims against the direct contractor’s payment bond. Unfortunately for the direct contractor and its surety, the payment bond obligated the surety, upon default by the direct contractor, to pay amounts due for “work and labor under the contract” between the direct contractor and owner. Seizing on the broad nature of the surety’s obligation and the unenforceability of the “pay-when-paid” provision, the Crosno court, like the Wm R. Clarke court before it, determined that the surety was obligated to pay the subcontractor’s claim regardless of the status of the direct contractor’s mechanic’s lien action against the owner.

The lesson to be learned from Crosno is that, while “pay-when-paid” provisions, in and of themselves, remain enforceable, they must be written in such a way that they neither run afoul of California’s statutory waiver and release scheme nor include patently unreasonable language. As such, we recommend that direct contractors review the payment provision(s) in their subcontractors to confirm that they remain enforceable.

Thinking Outside the eDiscovery Box: How Technology Solves Data Problems Beyond Litigation

Jim Gill | Ipro Tech

Back in 2006, when Rule 34 of the Federal Rules of Civil Procedure (FRCP) was amended to create a new category of discoverable information – Electronically Stored Information or ESI – eDiscovery was legitimized, and eDiscovery software was created to move ESI through the litigation process.

Fast forward to 2020, and ESI has grown in both size and complexity – terabytes (or even petabytes) of data from multiple sources like social media, email, chat, the Internet of Things (IoT) – and the goal of collecting, processing, and analyzing data for litigation has proven even more challenging.

But focusing on this challenge creates tunnel vision and overshadows other ways this powerful eDiscovery technology can be used. Anytime an organization needs to quickly ingest, organize, analyze, and report on large datasets, eDiscovery software offers an immediate solution and can be applied in various ways. One example is how government agencies are finding eDiscovery software is the perfect tool for responding to Freedom of Information Act (FOIA) requests.

Another example of thinking outside the eDiscovery box comes from J.S. Held, a company providing services for commercial contractors, allowing them to better understand where issues arise in their construction projects. In a recent conversation with Tim Martin, Technical Project Manager at J.S. Held, he shared, “We use the Ipro eDiscovery solution internally to handle the large volume of data created and generated during a construction project. When we receive hard drives of files from clients, Ipro enables us to quickly search, tag, code, and sort those documents, allowing us to review them with a streamlined approach and within a quicker timeframe.”

Previously, the team at J.S. Held would load files from clients, which in some cases had over a million documents, onto a file server, then have to manually open each one of those files and move them into a folder to classify them by type. “But by using Ipro analytics, we can do that on ingestion. As soon as the documents come in, we gain a clear picture of the data, and it can be quickly coded and classified, enabling us to cut sorting and coding times down to measurable hours, as opposed to the days it would have taken with our old process.”

In the end, that’s what eDiscovery software does: ingests a large volume of data, giving the user deep insight into what’s there with the ability to easily track and report those findings. It has so many applications across multiple industries, like commercial construction. It doesn’t matter if that data is a part of litigation or not. And as enterprise data continues to grow exponentially, this insight becomes more and more vital. As Tim from J.S. Held puts it, “By finding that needle in the haystack sooner, we can quickly and accurately communicate any issues to clients, which they greatly appreciate.”

Anti-concurrent Clause and Faulty Workmanship Exclusion

Larry P. Schiffer | Squire Patton Boggs

Anti-concurrent clauses preclude coverage even where the loss is partially caused by a covered cause of loss. This clause received considerable attention in hurricane-related coverage litigation following Hurricane Katrina. In a recent case, the Eighth Circuit Court of Appeals addressed the anti-concurrent clause in the context of damage allegedly caused in part by faulty workmanship.

In Joseph J. Henderson & Sons, Inc. v. Travelers Property Casualty Insurance Co. of America, No. 18-3341 (8th Cir. Apr. 20, 2020), a contractor installed panels on a building as part of an environmental project. The panels on the roof of the building were damaged during a windstorm. The contractor sought coverage under the owner’s (city) builder’s risk policy. The insurer disclaimed coverage because of the alleged faulty workmanship by the contractor based on the policy’s exclusion for faulty workmanship. The contractor sued seeking coverage and the insurer lost its motion for summary judgment. After a jury trial, judgment was entered in favor of the the contractor finding coverage. The appeals court affirmed.

The anti-concurrent clause was contained in the external event exclusion. It provided that the insurer would not pay for losses caused by certain external events. The exclusion stated that the policy would not pay under those circumstances regardless of any other cause or event that contributed concurrently or in any sequence to the loss. The court identified this as the anti-concurrent clause, also known to many of us as an anti-concurrent causation clause.

The policy had another exclusion for faulty workmanship. This is the exclusion relied upon by the insurer. The court found it important that the faulty workmanship exclusion did not include anti-concurrent language. In fact, the court noted that the exclusion provided that it did not apply “if loss or damage by a Covered Cause of Loss results.”

In affirming the denial of summary judgment, the appellate court rejected the insurer’s argument that the faulty workmanship exclusion included an anti-concurrent provision. The court construed the exclusion to provide that the policy would not pay for damage caused by faulty workmanship, except when the damage is caused in part by a covered event, such as a windstorm. The court concluded that the faulty workmanship exclusion did not contain an anti-concurrent provision.

The court also rejected arguments that the faulty workmanship was the sole proximate cause of the damage. Instead, the court held that the faulty workmanship and the windstorm were independent causes even though the damage could not have been caused by either independently of each other. Based on the evidence, the court held that the jury could have found that the contractor’s faulty workmanship was not the sole proximate cause of the damages. Accordingly, the denial of summary judgment was affirmed.