“Bad Faith”…almost sounds like an oxymoron. And while the use of the word ‘rages’ to describe the prevalence of bad faith litigation against insurance carriers seems a tad…overwrought, the usage of the term ‘rages’ is correct when describing the general perspective of insureds when they are forced to engage in litigation against their carrier. (Specifically, we at Sabal have never met an insured forced to take legal action for nonpayment of a claim…who didn’t have a pretty well-defined sense of rage regarding the matter.)
Insurance carrier bad faith is never fun to discuss and carriers DEFINITELY don’t like to do so (recall the Progressive Insurance social media debacle from earlier in 2012), but there are those instances where the insured-insurer relationship frays to the point that legal action is the final remedy for securing full and proper payment of a claim. The commentary piece on bad faith (link) includes some cases that are, likely, among the most egregious. But the underlying lessons would serve the observer (and insured) well to take note. That is…keep accurate records, make sure to maintain an objective history of the claim (i.e., don’t embellish facts…in the event of litigation, that HURTS…it does not HELP.) And also, insurance carriers DO have to perform some due diligence in order to process claims (on their end). But the primary takeaway – from our perspective – is the same as many insurance claims matters…that is? Document Document Document. Because that will be necessary if the matter gets to the point that only the attorneys are charged with sifting through the rubble to discern the final outcome (and payment!)
One way to AVOID bad faith litigation is to secure well-worded policies in the first place and to have a broker who understands your needs, concerns, and exposures and can help you navigate the claims process.
Vincent G. Nelan – November 19, 2012
I had a conversation about a price term used in construction contracts that I thought the person I was talking with should have known. When I reflected on that conversation, I realized that it has taken me some time to understand the terms used in construction contracts and that others may like to see a review of certain contract terms. This article will address pricing terms and provide some benefits and concerns about each.
Lump Sum/Stipulated Sum
This is likely the most basic way to price a contract. The party providing the work agrees to perform all the work for a specific price. The party buying the work agrees to pay a specific price for all of the work.
A benefit realized by the paying side is knowing exactly how much will be paid. The party providing the work may realize increased profits by controlling costs and less intense record keeping is likely required which can further reduce overhead and increase profitability.
A problem with this type of pricing for the paying side is the potential for the party providing the work to cut costs in an effort to increase profits. This concern can be addressed in other contract terms; for example, allowing for audits or over site of the quality of work provided.
A problem for the party providing the work arises if the estimate that lead to the agreed lump sum was low resulting in lost profits or actual out of pocket losses on the contract.
As with all pricing terms, the parties must carefully define the work so that each knows exactly what is being done for the amount paid.
Cost Plus a Fee
This pricing situation results in the amount being paid for the work being equal to the total actual costs of the work plus a fee for the party providing the work.
Problems arise in determining the “costs” and the amount or method of calculating the fee. For example is equipment needed to perform the work a reimbursable cost and is the fee based on the amount of the costs.
The party purchasing the work can benefit from lower costs than the estimate but the party providing the work may have no incentive to control costs if the fee is tied to the cost of the work.
The person buying the work must carefully review documents requesting payment to ensure that they are only paying the costs defined in the contract and to ensure that they are paying for costs actually incurred in performing the work.
Guaranteed Maximum Price (“GMP”)
GMP is the term that precipitated this article. This provision should usually be included with a cost plus a fee pricing scheme to ensure that there is an upper limit on the amount to be paid.
In this contract-pricing situation, the party providing the work guarantees that the party buying the work will pay no more that the GMP for the completed work. This sort of sounds like lump sum pricing. However, the GMP usually includes a calculation of savings. The savings is the difference between the GMP and the cost of the work plus the fee paid to the party providing the work.
Generally, the party buying the work receives the full benefit of the savings. However, the party buying the work can offer a portion of the savings to the party providing the work as an incentive to complete the work for less than the GMP.
We hope that this review of price terms in construction contracts can help you negotiate future contracts to your benefit.
In its recent decision in Aquarius Well Drilling, Inc. v. American States Insurance Co., 2012 U.S. Dist. LEXIS 172770 (E.D. Cal. Dec. 4, 2012), the United States District Court for the Eastern District of California had occasion to consider whether an insured’s professional negligence constituted an occurrence for the purpose of triggering coverage under a general liability policy.
The insured, Aquarius Well Drilling, was a well drilling and testing company. In 2007, it was hired by a title company to test a well on a property that was in escrow and pending sale. The purchasers of the property later brought suit against Aquarius, alleging that the company erred in performing the tests, which resulted in inaccurate information being disclosed regarding the well. Aquarius’ general liability insurer, American States, denied coverage for the underlying suit on the basis that it did not allege property damage arising out of an occurrence. Aquarius filed a declaratory judgment action against American States, which was dismissed earlier this year, although the court granted Aquarius leave to file an amended complaint. Aquarius subsequently filed an amended complaint which American States moved to dismiss on the same grounds; namely, that the underlying suit did not allege an “occurrence.”
Aquarius claimed that its negligence in testing the well was an occurrence, defined in pertinent part as an accident, because it did not intend for the unintended consequences of the well testing, i.e., harm to the underlying plaintiffs. American States, on the other hand, argued that Aquarius’ testing of the well was intentional, and as such could not be considered an occurrence regardless of the unexpected and unanticipated consequences of its negligence. In considering the issue, the Eastern District acknowledged that under California law, the term “accident” as used in the standard general liability policy definition of occurrence “refers to the nature of the act giving rise to liability; not the insured’s intent to cause harm.” The only exception to this rule is when “some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.”
Aquarius argued that despite this body of case law, its conduct in testing the well should nevertheless be considered an occurrence because it provided its client with objective information concerning the well, and because it did not offer any opinions as to the condition or future viability of the well. In other words, Aquarius argued that it was not giving professional advice, and as such, cases addressing whether an insured’s professional services can be an occurrence were distinguishable. The court did not find this to be a relevant distinction, explaining that the key consideration is whether the insured’s conduct can be considered accidental:
California courts have stated “accident” refers to the nature of the insured’s conduct, not his state of mind or to the consequences of the conduct … Thus, whether Aquarius’ well testing was done negligently or not, regardless of the unintended consequences, “the insured’s conduct alleged to have given rise to claimant’s injuries is necessarily non-accidental, not because any ‘harm’ was intended, but simply because the conduct could not be engaged in by ‘accident’.” … Plaintiffs could not have engaged in the well testing by “accident
Thus, the court concluded, the insured’s degree of knowledge concerning its negligence, and the content of its report, were irrelevant. Instead, because the insured intentionally tested the wells and provided information to its client in its professional capacity, such could not be considered an accident for the purpose of a general liability policy.
Josh Johnson – December 10, 2012
As Virginia construction lawyers, we are often called upon to assist our clients on troubled projects. Almost all of these projects suffer from a common denominator – broken relationships on the project.
It is rare to see claims on projects where the stakeholders (owner, general contractor, architect/engineer, and subcontractors) have effective working relationships, good communication, and are working together as a team.
So, to avoid claims, here is the best advice for parties on a construction project:
Trust and credibility. Relationships on a construction project are like any other relationship. They are founded on mutual respect and trust. Stakeholders need to remember to maintain their integrity – even on the “small” stuff because once trust has been lost, it is very hard to regain. For your organization, create a culture of integrity and teamwork. Over time, your reputation will lead to more work and better working relationships on projects.
Address problems directly. Deal with problems promptly – don’t put it off. When difficult conversations must be had, do it immediately. Unresolved issues can cause the parties to end up on different courses lending to significant issues later that would have been small in comparison if they had been addressed early. So, when problems come up, treat it like a band-aid, don’t slowly pick and pull it off – instead, just rip it off, but do so professionally and in a collaborative manner.
Owner/Architect/Contractor (OAC) Meetings. Go. Period. To have good communication, you have to keep the lines of communication open, and OAC meetings are a prime opportunity for recurring face-to-face meetings with everyone involved in the project. This is, hopefully, obvious to most of you. Regularly scheduled OAC meetings are THE place to have open discussions about the status of the project. Make attendance and OAC meetings, by your project management a requirement.
If communication breaks down on your project, it will cause a more difficult project, but even worse, it can lead to claims and ultimately even litigation. So, the best way to avoid that outcome is to ensure that your corporate culture emphasizes basic teamwork and communication.