Appraisal: Competent, Disinterested and Impartial. Are appraisers and Umpires Ever Actually Any of the Three?

Michael Buonocore | Property Insurance Coverage Law Blog | January 14, 2019

Recently, I presented at the Professional Public Adjusters Association of New Jersey educational conference on the area of insurance appraisal to roughly 30 public adjusters. During my preparation, I reviewed current and past appraisal provisions contained within standard insurance policies. In my research, I found some very interesting differences contained within insurance policy appraisal provisions concerning three key terms: competent, disinterested and impartial.

In analyzing four insurance policies: the 165-line, State Farm, ISO with standard HO3, and NFIP, I found that each policy contained very different uses and omissions of competent, disinterested and impartial as it pertains to appraisers and umpires during the appraisal process. Below you will see a chart1 that outlines, for each of the four policies, whether an adjuster or umpire involved must be competent, disinterested, and/or impartial during the process.

It is amazing to see that the insurance companies are writing appraisal provisions where the umpire need not be competent, disinterested or impartial such as the ISO HO3 and NFIP. These glaring omissions within each policy open up a host of issues which eventually make their way to the courts. However, depending upon the jurisdiction, the courts may rule differently.

In New York, an umpire under a standard fire policy is to be both competent and disinterested. However, the courts have ruled that using an appraiser or umpire who has had prior dealings with the insurer is not on its face evidence of being an interested party. In New Jersey, an appraiser must be impartial and disinterested. The courts have held that an appraiser in New Jersey can have previous dealings with the hiring party but must not have a pecuniary interest in the outcome of the appraisal process. In Pennsylvania, however, a contingency fee of an appraiser does not render them more biased than if paid on a flat fee basis.

Altogether, you can see from the above posted chart and changing language of appraisal provisions within insurance policies that you must be careful when invoking appraisal. Always read the policy, define the scope of the appraisal and put everything in writing.
1 Tim Ryles, Appraisal Clause in Homeowners Policies, International Risk Management Institute (IRMI), October 2014.

Maximizing Recovery of Liquidated Damages

Jessica E. Sabbath | King & Spalding | January 9, 2019

During construction and commissioning of large-scale energy projects, every day of delay or failure to meet plant performance requirements can result in the owner incurring substantial damages. Indeed, power industry owners can incur damages such as additional financing and administrative costs, in addition to lost operating revenues, if the plant cannot operate as scheduled. Because such damages can be difficult to prove, EPC contracts for power projects commonly provide for liquidated damages, which are a fixed sum contracting parties agree will be payable as damages for a specified breach. Negotiating for such damages can benefit owners because the damages resulting from a breach can be difficult to calculate. A liquidated damages clause allows the parties to avoid burdensome and potentially costly litigation regarding the amount of actual damages and provides certainty in the event of a breach.

Before agreeing to liquidated damages, however, owners should consider whether they would be better off seeking to recover their direct damages in the event of a breach. If a contractor will not agree to an amount of liquidated damages the owner believes would cover its actual, direct damages, it may be more advantageous to seek actual damages, as long as they could be proven without too much difficulty. Depending upon the circumstances and the parties’ respective bargaining power, a liquidated damages clause may not always be the best option.

Owners should consider the following issues when contracting for liquidated damages:

Ensure Liquidated Damages Will Cover Anticipated Losses

As noted above, an owner should carefully estimate its potential losses in the event of a breach and ensure the liquidated damages will cover these losses. At a minimum, liquidated damages should cover the cost of carrying the contract for the delayed period, including additional overhead, financing costs, and personnel costs. Because the contractor and owner must agree on the amount of liquidated damages, owners should be prepared to make their case to contractors for the amount they are seeking at the negotiating table. Having an upfront meeting of the minds as to the full extent of prospective damages an owner expects to incur in the event of a delay will help ensure that the contractor fully understands the risks and provides a realistic schedule and work plan.

Take Precautions to Prevent a Finding that Liquidated Damages Are a Penalty

Liquidated damages are intended to compensate the injured party for its losses, not to penalize the breaching party. Thus, as a general rule, most courts require that liquidated damages be a reasonable pre-estimate of the anticipated losses at the time of contracting. Some courts, however, also consider the actual losses sustained to determine whether liquidated damages are reasonable. And a few jurisdictions (such as Connecticut and Rhode Island) will not enforce liquidated damages clauses if the injured party cannot prove it has sustained at least some actual harm or damage, regardless of whether the liquidated damages were reasonable when viewed prospectively.

Courts will not enforce provisions for liquidated damages that are deemed to be a penalty, and owners can take precautions at the time of contracting to prevent liquidated damages from being held unenforceable on this basis. For example, an owner should internally document how it estimated its probable losses at the time of contracting. Owners should also exercise caution not to say anything a contactor could interpret as a threat that it will be penalized for a delay.

Because liquidated damages cannot be penal, some courts (including those in New York, Florida, and Illinois) have held that a contract may not contain a clause allowing an injured party to choose whether to seek recovery of its actual damages or liquidated damages (sometimes called an optional liquidated damages clause). These courts have stricken optional clauses and limited the plaintiff’s recovery to actual damages on the grounds that such clauses would penalize the breaching party and defeat the purpose of stipulating to liquidated damages. Notably, however, some jurisdictions have upheld such optional clauses, including Colorado, Idaho, and Washington. As the Colorado Supreme Court explained, parties have the freedom to contract for alternative remedies, as long as they do not pursue both.[1] Owners may benefit from optional clauses in jurisdictions where they are enforceable.

Maximize the Scope of Covered Losses

While liquidated damages are generally used as a remedy for delay, liquidated damages clauses may also include performance elements. As long as the clause satisfies the operative requirements for enforceability, a contract may provide for liquidated damages if a contractor fails to timely complete work in accordance with specified performance criteria. For example, the parties may provide that if the contractor fails to deliver equipment in accordance with the contractual specifications and performance standards, it must pay liquidated damages for each day of delay. This would apply if the contractor delivers the equipment on time, but it fails to meet the required performance standards.

Most liquidated damages clauses provide for recovery of liquidated damages through the date of substantial completion because the project can be used for its intended purpose at that time. As one court explained, if the contractor fails to complete the outstanding work after substantial completion, the owner may hire someone else to finish and sue the contractor for its breach.[2] Nevertheless, courts have allowed recovery of liquidated damages until final completion where the contract clearly reflects the parties’ intent to provide for such recovery.[3] If an owner reasonably anticipates at the time of contracting that its losses will continue until final completion, or that it will not be able to operate and earn revenue until that time, it should attempt to provide for liquidated damages through that date.

Know When Damages Are Recoverable and What Law Applies

Owners should be mindful that they may not be able to recover liquidated damages for any period of concurrent delay, which occurs when the owner and contractor both cause a delay that impacts the same activity, each of which standing alone would have impacted the completion date. When both parties concurrently cause a delay, there is an old adage that a contractor may be entitled to “time but no money” because of the inherent difficulty in proving causation. While the law is unsettled, the modern trend is to apportion delay damages if there is sufficient evidence to determine the extent of the delay attributable to each party.[4] Even under the modern rule, however, an owner may not recover delay damages if there is insufficient evidence to make this showing because the delay can be attributed to both parties’ simultaneous actions, or if the owner acted in bad faith, substantially contributed to the delay, or made it impossible for the contractor to complete its work.[5] As a general rule, these principles apply regardless of whether there is a liquidated damages clause or the owner is seeking to recover its actual damages.

Finally, it is important to include a choice of law provision and be aware of the operative law. In most jurisdictions, the party seeking to recover liquidated damages must plead and prove the clause is valid, while the opposing party must show the absence of elements of the prima facie case and has the burden to prove the clause is an unenforceable penalty. But even though many courts apply the same general principles, some courts impose a higher standard to invalidate a liquidated damages clause.[6] There is even a presumption of validity in some jurisdictions.[7] And as noted above, some jurisdictions only require that liquidated damages be reasonable prospectively, while other courts also consider the actual losses sustained. While no one wants to contemplate disputes regarding delay damages at the time of contracting, owners can benefit if the contract is governed by a state’s law that tends to uphold liquidated damages and imposes a heavy burden on a party seeking to invalidate them.

General Release of Contractor Upheld Despite Knowledge of Construction Defects

Garret Murai | California Construction Law Blog | January 14, 2019

Ah, the elusive Lepus Cornutus, commonly known as the Jackalope. Rarely seen, we may have one in SI 59 LLC v. Variel Warner Ventures, LLC, Court of Appeals for the Second District, Case No. B285086 (November 15, 2018), an interesting case involving a developer, a contractor, a general release, and Civil Code section 1688.

SI 59 LLC v. Variel Warner Ventures, LLC 

In 2005, Variel Warner Ventures, LLC (Variel Warner) entered into a construction contract with Verdugo Management & Investment, Inc. (Verdugo) to construct improvements at an 85 unit apartment complex. Under the terms of the contract, Verdugo agreed to construction the improvements in a good and workmanlike manner in strict compliance with all drawings and specifications and to comply with all laws. It didn’t. The work was defectively flashed, counterflashed, and waterproofed.

In the meantime, in December 2007, Sobrato Interests II (Sobrato) entered into a purchase agreement to purchase the property. Pursuant to the purchase agreement, Sobrato was not obligated to close escrow until “Final Completion,” which was defined as “all Improvements hav[ing] been constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract.”

The purchase agreement also contained a general release stating that Sobrato “shall rely solely upon [its] own knowledge of the Property based on its investigation of the Property and its own inspection of the property in determining the Property’s physical condition, except with respect to . . . [the] representations, warranties and covenants [made by Variel Warner].” Under the purchase agreement, Sobrato released Variel Warner and Verdugo, among others, from all claims including construction errors, omissions, or defects.

In 2008, Sobrato assigned all of its interests in the property to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests in the property to SI 59 LLC.  SI 59 LLC later observed water leaking from the podium and pool deck into the parking garage and sued.

In its complaint, SI 59 LLC alleged that Verdugo negligently constructed or inspected the structural concrete slab and slab waterproofing and that Variel Warner negligently managed, inspected and developed the property. SI 59 LLC further alleged that Variel Warner breached the purchase agreement by failing to deliver the property with all improvements having been “constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract.”

The Trial Court Decision

In the trial court, Variel Warner and Verdugo demurred to SI 59 LLC’s complaint on the ground that SI 59 LLC’s claims for negligence and breach of contract were barred by the general release contained in the purchase agreement.

In response, SI 59 LLC cited Civil Code section 1668 which provides that “[a]ll contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of law.” And, here, because Variel Warner and Verdugo were aware of the construction defects, the general release was void as a matter of law.

The trial court disagreed and SI 59 LLC appealed.

The Appellate Court Holding

On appeal, the Second District Court of Appeal held that while Civil Code section 1668 clearly “prohibits exculpation for future torts” (emphasis added), “[w]hether section 1668 might apply to past torts is a slippery question” (emphasis added), but that “the weight of authority recogniz[es] that section 1668 applies only to concurrent or future torts.”

However, while recognizing that Civil Code section 1668 only applies to “concurrent or future torts,” the Court of Appeal also recognized that depending on how a claim is asserted, Section 1668 could potentially apply although SI 59 LLC had not and could not adequately plead sufficient facts to have it apply.

As to SI 59 LLC’s negligence claim, the Court of Appeals held that Verdugo’s defective construction was a past event and that Variel Warner’s failure to properly manage, inspect and develop the property was a breach of a common law duty of care rather than a statutory violation (and, in any event, a past event) precluding application of Civil Code section 1668.

As to SI 59 LLCs breach of contract claim, the Court of Appeals held that the purchase agreement merely provided that Sobrato was not obligated to close escrow until “Final Completion,” and that while “Final Completion” was defined as “all Improvements hav[ing] been constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract,” the alleged breach that ‘Final Completion” had not occurred as defined “was not itself a negligent misrepresentation” triggering Civil Code section 1668.

The Court of Appeals suggested that if the facts were different, and SI 59 LLC had the ability  to claim that Variel Warner had affirmatively represented that the property was in fact constructed in substantial accordance with all plans and specifications and other applicable provisions fo the General Construction Contract and further that Sobrato reasonably relied on that representation, that a claim for negligent misrepresentation and application of Civil Code section 1668 might be tenable since reliance and damages would have been concurrent.


This is an interesting case. While the Court of Appeal’s decision is straightforward it seems that its decision was grounded primarily on how the purchase agreement was drafted. As described by the Court of Appeals, it sounds like Variel Warner made no representations as to the condition of the property in the purchase agreement (and, without a representation, there can logically be no “mis”-representation). I wonder though, how many purchase agreements are written in a similar manner.

California Court of Appeal Holds That the Right to Repair Act Prohibits Class Actions Against Manufacturers of Products Completely Manufactured Offsite

Gus Sara | The Subrogation Strategist | January 10, 2019

In Kohler Co. v. Superior Court, 29 Cal. App. 5th 55 (2018), the Second District of the Court of Appeal of California considered whether the lower court properly allowed homeowners to bring class action claims under the Right to Repair Act (the Act) against a manufacturer of a plumbing fixture for alleged defects in the product. After an extensive analysis of the language of the Act, the court found that class action claims under the Act are not allowed if the product was completely manufactured offsite. Since the subject fixture was completely manufactured offsite, the Court of Appeal reversed the lower court’s decision. The court’s holding establishes that rights and remedies set forth in the Right to Repair Act are not available for class action claims alleging defects in products completely manufactured offsite.

In Kohler Co., homeowners instituted a class action against Kohler, the manufacturer of water pressure and temperature regulating valves that were installed into their homes during original construction. The class action was filed on behalf of all owners of residential dwellings in California in which these Kohler valves were installed as part of original construction. The complaint asserted, among other claims, a cause of action under the Act. Kohler filed a motion for anti-class certification on the ground that causes of actions under the Act cannot be certified as a class action. The trial court denied the motion with respect to the Act but certified its ruling for appellate review. Kohler filed a petition with the Court of Appeals, arguing that certain sections of the Act explicitly exclude class action claims under the Act.

The Act revised and codified the laws applicable to construction defect claims related to newly constructed homes. The Act sets forth the standards for home construction, as well as rights and remedies for homeowners. When the Act was passed, it essentially became the exclusive remedy to individual homeowners for losses resulting from construction defects within their homes. The Act also established a builder’s right to attempt to repair a defect before a homeowner can file an action in court.

One of the essential purposes of the Act is to have construction defect disputes resolved expeditiously, and, if possible, to avoid litigation. The Act is specific as to the types of claims that fall under its purview and explicitly excludes certain types of claims. Section 896 of the Act states that the “title does not apply in any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.” The Act defines a “manufactured product” as “a product that is completely manufactured offsite.” In addition, section 931 identifies certain claims that are not covered by the Act, which include class actions. However, the last sentence of that section states that for “any class action claims that address solely the incorporation of a defective component into a residence, the named and unnamed class members need not comply with this chapter.”

The court acknowledged that while section 931 excludes class actions generally, the last sentence of that section sets forth an exception for class actions pertaining “solely [to] the incorporation of a defective component into a residence.” However, the court found that this provision needed to be reconciled with section 896, which excluded claims solely for defects within manufactured products. The court noted that a manufactured product qualifies as a defective component. Thus, in an effort to harmonize the two sections, the court held that the class action exception applies only to those claims related solely to the incorporation into the home of a defective component other than a product that is completely manufactured offsite. Based on this interpretation of the statute, the court reversed the lower court’s decision and granted Kohler’s motion for anti-class certification.

The Kohler Co. case narrowed plaintiffs’ ability to use the Act to pursue class action claims. The court’s interpretation of the Act establishes that plaintiffs cannot use the Act to assert class action claims for defects in manufactured products. Thus, the Kohler Co. decision reminds us that a cause of action under the Act is not permitted for any claims, whether individual or class actions, against manufacturers for alleged defects of products completely manufactured offsite. On the flipside, this decision also reminds us that product manufacturers are not afforded the defenses of the Act.

Insurance Agent Versus Experienced Policyholder Attorney Viewpoints About Insurance Coverage Denials

Chip Merlin | Property Insurance Coverage Law Blog | January 13, 2019

Ed Eshoo works out of Merlin Law Group’s Chicago office and is one of the best property insurance policyholder coverage attorneys you could find. I do not think there is anybody with a national reputation as being “the expert” on the 165-line Standard Fire Insurance Policy on a national, rather than state, basis. Ed is an extreme competitor, and it shows in his daughter Emily Eshoo who is a varsity basketball player at the University of Tampa.

Ed Eshoo wrote a post last week, Ask An Allstate Insurance Agent, that had two of the foremost insurance agent educators in the country, Bill Wilson and David Thompson, write responses. It would be a real treat for an audience if we could ever get Ed, Bill, and David together on a panel discussing insurance coverage and insurance viewpoints because they are experienced, knowledgeable, passionate, and fun people. All of us are better for knowing and having a chance to read and learn from their thoughts.

Everybody in the insurance agent or insurance coverage business should buy Bill Wilson’s recent book, When Words Collide: Resolving Insurance Coverage and Claims Disputes. Bill Wilson made this statement in his work:

Unfortunately, in far too many cases, the denial of a claim is seemingly inexplicable. I’ve spent much of my career assisting independent agents in convincing claims adjusters that a loss is covered. Over the past few years, I began keeping an electronic copy of many of these inquiries where the adjuster’s (or agent’s) logic makes no sense. At last count, the number totaled 519.

I could fill another book with these bizarre rationales for and against coverage. All too often, they arise from ignorance stemming from substandard (or no) education or the failure (or inability) to read, with comprehension, what the policy forms actually say.

Bill Wilson correctly notes that most claims presented get paid by the insurance companies. I am not so certain whether all the claim value that should get paid is actually paid from my view and experience. However, the point is that most claims do get paid. Attorneys are not hired and everybody is happy, even if unaware they may not have been fully compensated.

If this is the case, I would suggest that Ed Eshoo’s experience and viewpoint (as well is mine) is based largely upon denied claims and claims where a coverage gap exists that could have been prevented with a different insurance product sold. Nobody is calling Merlin Law Group attorneys explaining and celebrating how routine or tough insurance coverage calls are made in the policyholder’s favor. Merlin Law Group attorneys are usually called to help resolve the coverage or valuation problem existing in a property insurance claim.

Merlin Law Group attorneys routinely get referrals from upset insurance agents who cannot convince ill-informed insurance claims adjusters. I would love for Ed Eshoo to spend a few weeks on the road with David Thompson since David invited him to do so—almost as a challenge. I think David Thompson and Ed Eshoo would quickly become friends. David Thompson would learn how good of a person and attorney Ed Eshoo is. From my viewpoint, putting those two smart people together would show David’s independent agents there exists another breed of policyholder lawyer they have never met. Ed Eshoo may find his reputation, legend, and his professional learning growing as well.

Differing viewpoints when professionally analyzed in a positive manner create growth. I feel gratitude to know Ed Eshoo, Bill Wilson and David Thompson. When they speak, people should listen.