Polarizing Design Defect Claims Law Could Be Refined

Jason D. Salvin | Daily Business Review | June 9, 2017

On May 12, 2003, I took a leap of faith and left my job working for one of the nation’s leading general contractors to join the legal profession. Eight days later, the Florida Legislature presented then-Gov. Jeb Bush with a revolutionary bill intended to reduce litigation associated with construction and design defects claims in Florida state courts. The bill was approved by the governor a few days later, became effective on May 27, 2003, and is now commonly known in the construction industry as Chapter 558.

The original 2003 version of Chapter 558, aptly categorized as a notice and opportunity-to-cure statute, contains a legislative finding and declaration preamble in the first section (558.001) that sensibly states an effective alternative dispute resolution, or ADR, process in certain construction defect matters should involve the claimant filing a notice of claim with the builders, suppliers or designers that the claimant asserts are responsible and should provide them with an opportunity to resolve the claim without resort to further legal process.

By way of example of the firestorm of controversy and competing interests that erupted almost immediately after the inception of Chapter 558, the modest single sentence premise included in the preamble of Section 558.001 was modified by the Florida legislative body in 2004, 2006 and 2015.

The modified findings and declaration preamble included in the latest version highlight and perhaps clarify the Legislature’s intended or revised goals of reducing the need for litigation, protecting the rights of property owners, including the insurers of the accused in the Chapter 558 ADR process and specifying “confidential settlement negotiations” as part of the required “opportunity to resolve the claim.”

I can say with confidence that it appears the world has been polarized into two passionate groups: those who believe Chapter 558 works and would like to see it further refined, and those who don’t think Chapter 558 is necessary and would like to see it abolished. In my experience, critics and supporters who have dealt with Chapter 558 matters generally seem to agree that in most instances, it is beneficial to engage legal counsel as part of the Chapter 558 process in light of the risks and potential rewards inherent in the process.

Generally speaking, the simple premise of Chapter 558 to enact a fair and beneficial notice and opportunity-to-cure process has grown more complex and controversial with each iteration, and appears to be correspondingly more politically charged as the risks and rewards for the participants and nonparticipants becomes more apparent.

More Modifications

If history is indicative of future events, Chapter 558 will continue to evolve, and Florida’s immense condominium association and property management industries, contractor, supplier/manufacturer, design professional industries, and insurance and surety industries will be watching closely and, in certain instances, lobbying for further modifications to Chapter 558 and perhaps even its repeal.

The original version was revised on average of once every two years. Notwithstanding the six prior amendments, at the close of the legislative session in May, two bills which contain significant controversial changes to Chapter 558 died in committee. More specifically, Senate Bill 1164 and House Bill 1271 contained proposed changes to subsections 1, 2, 3, 7 and 10 of F.S. 558.004, including the following examples:

• Requirement for a claimant to personally sign the notice of claim, as opposed to having the notice of claim signed by the claimant’s counsel or claimant’s consultant(s);

• Requirement in the House bill for a claimant and any experts retained by the claimant concerning the claim, to be present at the Chapter 558 inspection[s] to identify the location of the alleged construction defects. The Senate bill includes a similar requirement except that it allows the claimant’s agent(s) to attend in the claimant’s place;

• Requirement that the person who is served with the notice of claim by the claimant must forward it to each contractor, subcontractor, supplier, or design professional that person who was served reasonably believes is responsible for each defect specified in the notice of claim. The current version of Chapter 558 (2015) states that the person “may serve” other entities/persons; and

• Requirement that the claimant personally sign any rejection of an offer properly served pursuant to Chapter 558, and that prior to such rejection, the claimant must serve a written demand for mediation on the person who made the offer. Unless mediation is waived by the offeror, it must take place within 20 days of the demand. Additionally, the claimant’s demand for mediation must explain why the claimant considers the offer to be inadequate.

As Florida’s next wave of construction and design defect claims approaches, Chapter 558 remains the law of the land, and it is imperative for property owners, associations, developers, designers, contractors, subcontractors, suppliers, insurers and others to understand the risks, potential rewards and the proposed legislative modifications to sensibly allocate resources and plan for the future.

Insuring to Value: Replacement Cost vs Reconstruction Cost

Chip Merlin | Property Insurance Coverage Law Blog | June 23, 2017

A recent post, Insurance Agents and Determining Coverage Limits for Buildings, generated a number of very interesting comments about the differences between Replacement Cost Value of a building and the Reconstruction Value of a building. There is a difference between the two values and it is a big issue.

A.W. Hooker posted an article soliciting it services, Replacement or Reconstruction Cost Estimate, which discusses the difference and explains the significance of insuring to value and obtaining coverages which reflect reconstruction costs rather than replacement cost values when deciding on policy limits and coverages for structures:

Attachment-1

How do insurance companies calculate the replacement cost?

There is no standard method used by insurance companies but most often a construction cost manual such as Marshall & Swift will be referenced for the unit cost per square foot of a similar type of building and multiplied by the area of the subject building.

Why is this a flawed way of calculating the replacement cost?

Because it is theoretical replacement with a similar type of building and not an actual reconstruction cost evaluation, which includes for all costs associated with reconstructing a building at today’s standards and codes. Other costs are not considered with replacement cost, such as demolition of the existing destroyed building. While replacement cost is merely the cost to replace the building using the same as or far as possible the same material and design as what exists.

When is a replacement cost appropriate, when is a reconstruction cost appropriate?

For many simple or standard types of buildings the replacement cost taken from a cost manual may be appropriate. However if there is any non-typical or unique characteristics to the property it will likely not be appropriate. For any special purpose property or special use property only a detailed reconstruction cost estimate prepared by a Quantity Surveyor will properly account for all the unique characteristics present.

In many cases, the replacement cost calculated from the ‘black book’ value will not be enough to cover the costs to rebuild the property. Should a loss occur, the owner would be out of pocket for rebuilding expenses over and above the ‘black book’ value. It is recommended that in all cases, a reconstruction cost estimate be used, particularly when the property is used for commercial purposes.

What sort of rebuilding expenses are not taken into consideration from the ‘black book’ value?

Demolition and clearance of the site, shoring up of neighbouring buildings, reinstatement of any non-structure components of the site (such as a parking lot, landscaping or below grade services) allowance for the escalation of the cost of labour and materials in the future, permit fees, and any premiums associated with construction for the property’s geographic area.

The ‘black book’ value also does not take into consideration that should your property need to be rebuilt, it would have to be built to be compliant with the current building code, which could have a serious impact on the design and materials you must use to rebuild. A Replacement Cost Estimate will only cover the cost to replace the building with one of comparable size, utility and materials. For example, it would not take into account that your new building will require an elevator (where a narrow staircase previously sufficed).

What are the other considerations that will be taken into account for a Reconstruction Estimate?

Heritage components, current building codes, construction standards, accessibility, building material availability, etc,

The Massachusetts Association of Insurance Agents held a seminar on the topic. The PowerPoint presentation, Replacement Cost v Reconstruction Cost v. Total Component Valuations: Is the Client Covered Effectively? provides an excellent discussion of policy coverage terms causing gaps in coverage. The author noted that the primary problem for the agent is found in the rules to determine valuations, policy limits, and policy language. The presentation warns through numerous examples that replacement cost values may leave the policyholder with significant out of pocket expenses.

The problems of properly insuring a structure with values that do not leave the policyholder with gaps of coverage and for limits sufficient to reconstruct are complex. I find it amusing that judges, not trained in the nuisances of insurance, write so many opinions that the policyholder is in the best position to make this analysis. Really? If agents cannot even figure out which values to use and have to be taught to understand the potential gaps of coverage, how can a uneducated consumer be in a better position?

Water Damage Loss Time Limits and Hidden Damage—What Do Insurers Promise to Departments of Insurance?

Chip Merlin | Property Insurance Coverage Law Blog | June 26, 2017

I spoke about water damage loss at the National Association of Public Insurance Adjusters Annual Convention last week. One issue I discussed was the time limits of water damage. A recent post, Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions” also discussed the issue.

Following my presentation, Lorinda Mikesell, the Vice President of the Texas Association of Public Adjusters, asked whether such time frames are effective when water damage is hidden.. Lorinda said that at least one insurer promised to cover water damage despite the time limitation if the loss was hidden, and she sent me the following Texas Department of Insurance Order which stated:

“USAA has indicated how it intends to adjust a covered water claim if mold is present on the damaged covered property. USAA has represented to the Department that even though its Homeowners policy and Condominium Unit Owners policy excludes loss caused by or consisting of mold, mold is necessarily removed or treated in the process of repairing damage resulting from a covered water loss. Mold that is present upon water damaged materials will be removed in the course of repairing the covered water loss. Expenses which are related solely to the existence of mold are the only expense which would not be covered in the course of repair of a covered water damage claim. In addition, notwithstanding the exclusion for constant repeated seepage or leakage of water or steam over a period of weeks, months, or years, USAA agrees to cover the cost of reasonable and necessary repair of direct physical damage to the dwelling or property caused by a covered water loss that is hidden or undetected and the associated direct physical damage consisting of mold, fungi, or other microbial damage to the dwelling or property, provided the insured reports the loss within thirty days of the date the damage was or should have been detected. This would not cover the cost of remediation, testing, loss of use, or debris removal. Remediation means to treat, contain, remove, or dispose of mold, fungi, or other microbes beyond that which is required to repair or replace the covered property physically damaged by water or steam.”

(Emphasis added)

I often say that I learn more when speaking at conferences than an audience may learn from my presentation. I was not aware of this “promise” by USAA, and I am thinking of how we may ask insurers in discovery for similar filings with Departments of Insurance that explain the language used in policies. I wonder if USAA has this promise explained in writing to their claims adjusters.

Resolving Disputes Regarding Value of the Loss through the Appraisal Process

J. Robert Keena | Hellmuth & Johnson PLLC | June 13, 2017

With an increase in storm damage events throughout the Midwest, insurers are becoming increasingly frugal when adjusting storm damage losses. In the past, disputes regarding the value of the loss typically involved disagreements on pricing. Today more aggressive practice by insurers on even the most basic hailstorm can result in complex arguments regarding scope of repair, and cost of repair coverage.

Under Minnesota law a process exists to resolve disputes regarding the value of the loss which, theoretically does not require Court involvement. This process is known as the “appraisal process.” The typical insurance appraisal provision can be found in Minnesota Statute §65A.01 et seq. or in the language of the insurance policy. Traditionally disputes regarding coverage (i.e. whether or not a loss is covered or whether or not the insured has complied with the terms of the policy) are not resolved under the appraisal process.

The appraisal process is not supposed to be complex. It is very much like an arbitration about the cost of repair. Each side (the insurer and the insured) appoint an appraiser to represent their interests. These two appraisers select a neutral umpire. If the two appraisers agree on the value, the umpire’s role is limited. If however the two appraisers do not agree on the value of the damage, the umpire acts as the tiebreaker. The insured and the insurer each pay for their own appraiser and one half of the cost of the umpire.

Appraisals can sometimes be very informal whereby the appraisers meet to discuss the value of the damage and hopefully come to an agreement. If they cannot agree they bring in an umpire to make a decision. The process can also be more formal whereby the panel hears evidence presented by the insured and the insurer regarding the value of the loss. This can sometimes involve lawyers presenting the evidence in a manner very similar to an arbitration and even involve testimony and cross-examination.

There are several trends in first-party insurance claims which should concern individuals involved in the Community Association industry. One trend is an increase in outright denials of the right to appraisal wherein insurers argue that the issue is not one of value but of scope of damage. They then argue that scope is not the same as value and therefore appraisal is not appropriate. Often insurers will argue that they do not agree that some aspect of the property is damaged and, therefore since they say there is no damage, the dispute is not about value of the loss but instead is a question of coverage. Throughout the Midwest insurers are taking this stand in an effort to limit the size of property insurance claims presumably under the theory that only a limited percentage of insureds will commence a lawsuit in order to compel the appraisal process.

Another disturbing trend that insurers are pursing more regularly is an insistence that a non-neutral umpire be appointed. Historically the two appraisers could easily select a neutral umpire and move forward. Today insurers are increasingly suggesting a non-neutral umpire to act as the tiebreaker and forcing insureds to commence a lawsuit seeking court appointment of a neutral umpire. Presumably, the insurers are hoping that the additional cost of commencing a lawsuit to petition the court to appoint an umpire will weed out some insureds who need to maximize their funds in order to repair damages. These trends are troubling for insureds in that many claims which would have been easily resolved in the past are now requiring Petitions for Appointment of Umpires or lawsuits seeking to compel appraisal.

In the past few years, there have also been more disputes regarding the scope of the appraisal panels’ role. Insurers have argued that appraisal panels cannot decide issues such as whether or not policies require them to provide matching materials for a damaged building. Insurers have also argued that causation of the damage is not a proper consideration for an appraisal panel either. Courts are generally coming down in favor of an expanded role for appraisers. They are finding that appraisers can make decisions regarding the reasonableness of product matches for materials to be installed and acknowledging that at least some limited causation analysis is needed by an appraisal panel to properly evaluate a claim.

When deciding whether a demand for appraisal is proper, there is a simple question that one must ask themselves. The question is this: Has the insurance company offered to pay an amount sufficient to repair the damage? If they have not offered a sufficient amount to repair damage but instead are simply seeking to find arguments to diminish the adjusted total, the appraisal process is likely quite ripe. The difficulty for property owners occurs when the dispute is smaller than the cost of paying for an appraiser and half of the umpire. Very often insurers are gaining the benefit of this apprehension against tacking costs upon an already diminished adjustment amount.

It is important to remember when information is presented to an appraisal panel that it should be clear, concise and descriptive. If the insurance company claims that the damage does not include damage to features on the building such as soft metal, gutters, downspouts, or window frames, photographic evidence and an opportunity to inspect the property by the appraisal panel can be an asset for the insured. It is equally important, that the insured acquires estimates which plainly include the full scale of the damage rather than the scale of the damage claimed by the insurance company.

One other extremely important and relevant insurance policy consideration in working on property damage claims is the deadline for making a legal claim. Often times people make the mistake of believing that the “right to suit” provision under an insurance policy (typically two years pursuant to Minnesota Statute §65A.01 et seq.) begins to run from the date of denial of a claim or the date a dispute arises regarding the value of the claim. It does not. That deadline runs from the date of the loss itself whether or not there has been a denial.

There are several basic steps which must be followed when a property damage claim arises. They include: 1) Immediately notifying the insurer that a loss has occurred; 2) Mitigating damages to the property by protecting any aspect of it which has been exposed to the elements; 3) Cooperating with the insurer pursuant to policy cooperation clause. (Failure to cooperate with an investigation can be a separate basis for denial of the claim); and 4) Acquiring independent estimates for damages. If these steps are followed and there is a difference between the value of the loss as purported by the insurer and the value of the loss based on the insured’s own investigation, and negotiation is unsuccessful, the next step is appraisal.

Anyone assisting an Association with an insurance claim should be aware of the limitations period and the appraisal provision contained in the policy. The appraisal provision in particular offers a neat, clean and distinct way to resolve disputes regarding the value of the loss. If the insurance company is not offering enough to fix the damage the first thing that should come to mind is the appraisal process.

Fla. Gov. Signs 2 Construction Law Bills Backed By Builders

Nathan Hale | Law360 | June 15, 2017

Construction companies applauded Florida Gov. Rick Scott’s signing Thursday of two bills that they say will open competition for state-funded projects and give builders more say and certainty on when a statutory window of liability for completed projects begins to run.

H.B. 599 preempts local laws and mandates on projects in which more than half of the funding comes from state appropriations, while H.B. 377 creates a definition of “completion of the contract,” which gives builders some say along with project owners on when the statute of repose is triggered.

The Associated Builders and Contractors, which describes itself as the largest commercial construction association in Florida, said in a statement Thursday that it been pushing for five years for the steps taken in H.B. 599, which was sponsored by Rep. Jayer Williamson, R-Pace, and in the Senate by Sen. Keith Perry, R-Gainesville.

State law requires state contracts for construction services projected to exceed $200,000 to be awarded competitively, with a threshold of $300,000 for counties, municipalities, special districts and other political subdivisions, according to legislative documents.

Local laws such as the city of Miami’s Responsible Bidder and Wage Rate ordinances have allowed municipal governments to put pre-bid mandates on contractors regarding whom they must hire, where they must train, what job fairs they have to hold and what benefits they have to offer to bid on projects, according to the ABC, which said these myriad requirements would push projects out of reach for small businesses by driving up costs.

“If taxpayers are paying for a project, the government certainly has a role to play in the bidding and selection process,” Peter Dyga, president and CEO of ABC’s East Coast Chapter, said in a statement. “But it shouldn’t limit competition or shut out qualified, licensed contractors, subs or tradesmen.”

Rep. Williamson suggested the local laws had motives beyond ensuring minimum wages and benefits for workers.

“Weeding through bidders before they even get a chance to bid so that you can award the project to groups you want is nothing other than Good Old Boy Politics,” he said in a statement distributed by the ABC. “I didn’t vote for them as a county commissioner, and I won’t as a member of the Florida House.”

The new law, which passed 77-40 in the House and 20-17 in the Senate, does not cover projects that include federal funding, among some other exceptions, according to the ABC.

H.B. 377, which was sponsored in the House by Rep. Thomas J. Leek, R-Daytona Beach, with a corresponding bill presented by Sen. Kathleen Passidomo, R-Naples, clarifies when the four-year and 10-year statutes of repose begin for bringing claims of a construction defect or latent construction defect.

The law specifies that the date of completion of a contract — one of four triggers of the statute of repose — is the later of the date of final performance of all contracted services or the date that the final payment for those services becomes due — without regard to the date that final payment is made, according to legislative records.

The Fifth District Court of Appeal had ruled in 2013 that a contract was complete under the relevant state law on the date final payment is made, according to a legislative staff report.

Project owners had exploited this ruling, by delaying making the final payment to contractors — even by a penny — to keep the clock from starting on the statute of repose.

“In many instances, this created open-ended liability for builders, increasing lawsuits and the cost of doing business,” the ABC said.

The ABC noted that the bill sailed through both chambers on its way to passing 37-0 in the Senate and 114-0 in the House.

Both laws take effect July 1.