Restoration Contractors Providing Great Quality Workmanship Are Policyholder Friends But Many Insurance Companies Refuse To Pay For Quality

Chip Merlin | Property Insurance Coverage Law Blog | February 17, 2019

Contractors often tell me and other Merlin Law Group attorneys of the crazy excuses and refusals insurance adjusters give to avoid paying for required construction materials, processes, and practices which constitute quality workmanship. Cheap and non-quality construction is easy to do and often overlooked by policyholders completely unfamiliar with the detailed specifications demanded by manufacturers of materials, building codes and OSHA requirements which must be followed for legal and quality construction to take place. Insurance company claims mangers know that doing construction right is a lot more expensive and demanding than paying for cheap construction.

An excellent article, Quality Construction Management, was published by International Risk Management Institute n/k/a IRMI and concludes:

A contractor must have a robust quality management program as it is critical to the overall success of a construction project. An effective program creates a process for clarifying standards and requirements, established means and methods for managing the process, defines responsibilities and accountabilities, and adds another avenue to more effectively manage the supply chain, while it reduces misunderstanding and potential conflict. It effectively facilitates and manages the collection of data, identifies performance discrepancies and nonconforming work, and substantially increases efficiency by reducing defects and punch list work, which aids in. improving the working relationship with the design team and the project owner. It systematically manages quality and enhances the contractor’s project delivery, increases productivity, eliminates or reduces waste, and ultimately improves profitability.

It does not take a rocket scientist to figure out that quality contractors performing the type of work discussed in the IRMI article cannot possibly stay in business if insurance companies demand “cheap” pricing. Contractors and policyholders reading this post should also read, Insurance Company Adjuster Training Scripts and Role Paying, on how insurance companies teach their adjusters with scripts to avoid paying contractor demanded pricing as well as overhead and profit costs.

Many insurance claims departments have a culture that will only pay for “okay” construction. AT&T’s current advertising campaign about “okay” services and products makes the point. Would you want just an “okay” surgeon or tattoo artist? Would you want your sushi to be just “okay?” Would you search for and buy your grand-baby the “cheapest but acceptable” car seat?

Yet, when it comes to insurance restoration construction, I have never heard an insurance company property insurance adjuster demanding that the contractors providing their pricing, or the pricing found in Xactimate, to be only from quality contractors with the types of processes and culture I quoted from in the IRMI article. They always go cheaper and for “okay” construction. They wrongfully allow the “cheap” contractors to provide data for pricing used by Xactimate.

Quality restoration contractors fighting these adjustment practices are heroes for all of us. Demanding fair pricing which allows for quality and standing up to the insurance industry adjusters is admirable. It is far easier to accept lower pricing and provide cheap and inferior workmanship.

A post about how State Farm tried to influence and obtain “okay” construction and pricing is found in, Membership in Professional Organizations Helps a Small Public Adjusting Firm Achieve a Big Result. Clay Morrison was a State Farm preferred construction vendor. The State Farm claims manger demanded that Morrison provide unethical pricing which would only result in cheap construction. Rather than acquiesce and keep the State Farm business, Clay Morrison rose to the occasion at his moment of truth and refused. He lost State Farm’s business, but he was a champion for all policyholders, his family and himself.

Similar battles are being fought every day by those in the insurance restoration construction trade. Those contractors that follow the rules and refuse to become just “okay” should be congratulated.

Damages For Delay-An Update

Henry L. Goldberg | Moritt Hock & Hamroff | February 12, 2019

One of the most significant developments in construction law of late concerns an issue I have been actively involved in for some time. It is a coordinated, industrywide effort to eliminate “no damages for delay” clauses for public construction. As with the federal government, and many other states, delay damages must be recognized when the acts and omissions of the public owner interfere with the progress of work.

I have good news and bad news on this front. First, the current industry legislative bills to “outlaw” no damages for delay (modeled in large part from the language of the current New York State Office of General Services contract) was very well received in Albany.

Both Houses of the legislature clearly “got it.” The bills passed both the Senate and Assembly overwhelmingly. In fact, the Senate vote was unanimous!

The bad news is that Governor Cuomo just vetoed the bills on December 28, 2018. This cannot be tolerated! The Governor’s veto message was largely predictable: much rationalization and misunderstanding concerning the unfair abuse of “no damages for delay.” Why does the State fear the recognition of delay damages caused by its own acts and omissions? Should not the party causing damages bear its fair share of this burden? Is it not the government in a better position to take the financial hit, particularly of its own making, rather than a private company?

Take, for example, these meaningless statements from the heart of the Governor’s veto message. None of the statements are true:

This (vetoed) bill also suffers from certain technical deficiencies. For example, it would broadly permit recovery for delays “caused by the owner’s acts or omissions” regardless of whether costs claimed are reasonable. By requiring public entities to place such clauses in all construction contracts, with no ability to define the terms or negotiate the circumstances under which certain costs may be compensable, the State and other public entities would be exposed to costly and complex litigation over the meaning and application of these terms and further delay projects while these issues are arbitrated or litigated.

One can only wonder if statements such as these are caused by an actual or feigned lack of understanding. I fear the latter. However, the harsh results are the same either way.

It is our plan now not to let the strong support of the legislature be dissipated and wasted. We will not wait for this year’s new legislative session to progress, but will immediately reach out to the Governor’s staff to see if some accommodations can be worked out politically. I can attest to the fact that the Governor’s legal staff failed to accept our repeated offers to help them become better informed on the issue. We will again be reaching out to them, perhaps using the veto message as a road map, laying out the foibles of the message and the absolute need for relief. Any politician who claims to be a friend of the industry should do no less. They should want to be assured that they are well-versed before taking the drastic action of vetoing such critically necessary remedial legislation. The construction industry is far too important throughout the state.

While on the topic, and in case there’s any doubt as to the urgency of this reform legislation, a New York appellate court recently ruled in the matter WDF, Inc. v. Columbia University and Lend Lease and callously affirmed the dismissal of the contractor’s entire delay claim based solely on the “no damages for delay” clause provision of the contract. The dismissal was narrowly based on the argument that the claimant did not set forth sufficient factual allegations supporting its claim that such “alleged delays fell within the exceptions to the ‘no damages for delay’ rule.” This was extremely harsh. Before a court deprives a party of its day in court, it should tread very carefully. Strict lawsuit pleading requirements have never been the modern rule in New York State, but rather, what we lawyers call “notice pleading,” which merely requires giving the adverse party a fair sense of what the claim against it involves.

Ill-founded, or just plain wrong, decisions such as this would be completely obviated if the legislation we seek was enacted. We need a declaration that “no damages for delay” clauses are unenforceable in New York as against public policy.

MH&H Commentary

The industry must and will continue its efforts to combat the harm caused by sweeping “no damages for delay” clauses in public contracts. That effort (coupled with opposition to strict claim notice and damage record keeping requirements which I have referred to on these pages as “contractor forfeiture enhancement devices” or “COFEDs”) have changed the legal environment in the industry. The risks are too great for the contracting community to allow the government to shift all risk to contractors or subcontractors. This is particularly so, when the government is usually the source of the problem with deficient plans and specifications, as well as, sub-standard project supervision and coordination.

Finally, I would like to extend our sincere thanks to all of you who responded to the call to reach out to your own Assemblymen or Senator at the grass roots level. The overwhelming votes in support of our bills were hard fought and your efforts were indispensable. Thanks. I promise you’ll be hearing from us again soon.

No Coverage for Defects in Subcontrator’s Own Work

Tred R. Eyerly | Insurance Law Hawaii | February 11, 2019

    Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured’s CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019). 

    In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or “pop-outs,” were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.

    On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to “your work,” defined as “work or operations performed by you or on your behalf.” Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage. 

    Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term “occurrence” in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor “did not physically injure or damage any tangible property other than the floor system it installed.” Thus, under the terms of the policy, property damage did not occur. 

    Consequently, Old Republic’s motion for summary judgment was granted and the case dismissed with prejudice.

Northern District of Illinois Dismisses Statutory Bad Faith Claim Against Insurer Where Bona Fide Coverage Dispute Existed and Insured Failed to Plead Sufficient Facts Showing that Insurer Unreasonably Refused to Comply with Policy Obligations

Patrick F. Nugent | Bad Faith Sentinel | February 13, 2019

Propitious, LLC owns a two-story building and leased the first floor of the property to Connacht, LLC, which used the space to operate a restaurant and sports bar.  Propitious insured the property under a policy issued by Badger Mutual Insurance Company; Connacht insured the restaurant and sports bar under a policy with Society Insurance.  In December of 2016, there was an incident in which multiple water pipes burst on the second floor and caused damage to the property and Connacht’s restaurant and sports bar on the first floor.  Following an investigation of the damage by each of the parties, Society tendered payment to Connacht for some of the damaged items, but declined to cover other items that it viewed as permanent parts of the building and believed should be covered by Badger.  Propitious, for its part, submitted a claim to Badger for damages to the property.  Badger tendered payment for some of the loss, but it also assigned a portion of the coverage responsibility to Society.  Society denied responsibility for the amount claimed by Badger.  After unsuccessful efforts to reach agreement on the disputed coverage issues, Propitious and Connacht filed suit against Badger and Society asserting several claims, including a statutory bad faith claim Connacht brought against Society.  Society moved to dismiss the bad faith claim (among others not discussed here).

The court dismissed the bad faith claim without prejudice in Propitious, LLC, et al. v. Badger Mutual Insurance Company, et al., No. 18 CV 1405 (N.D. Ill. Feb. 7, 2019).  The statutory bad faith claim was brought under § 155 of the Illinois Insurance Code, which “allows for an award of attorney fees and costs for an insurer’s ‘unreasonable and vexatious’ refusal to comply with its policy obligations” (quotations omitted).  “However, if a bona fide coverage dispute exists, an insurer’s delay in settling a claim will not be deemed vexatious or unreasonable for purposes of section 155 sanctions” (quotations omitted).  The court rejected Society’s argument that a heightened pleading standard applied to Connacht’s bad faith claim, but accepted Society’s argument that Connacht failed to state a statutory bad faith claim.  “Although Connacht alleges that Society has not paid all it is owed under the policy, it fails to plead sufficient facts that show Society wrongfully and unreasonably refused to comply with its policy obligations.”  Rather, “the complaint reveals that Society participated in discussions to attempt to resolve the coverage dispute, investigated Connacht’s claim, including retaining a third-party adjuster to evaluate the damage to the audiovisual equipment, and made payments for those damages that it determined were covered under the policy in excess of $142,000” (citations omitted).  In addition, the court ruled that “because a bona fide coverage dispute exists regarding which items are covered under the policy, Society’s actions cannot be considered ‘vexatious or unreasonable’ under § 155.”  Thus, the court concluded that Connacht failed to state a statutory bad faith claim against Society and dismissed the claim without prejudice.

Bailout for an Improperly Drafted Indemnification Provision

David Adelstein | Florida Construction Legal Updates | December 22, 2018

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact.  In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect). 

This opinion arose from a construction defect case, CB Contractxors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on thecontractual indemnification provision in the subcontracts.  Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06.  The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06.  (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.) 

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail.   But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.  

This case leads to a couple of very important takeaways:

  • Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06.  Have a construction attorney review the indemnification provision.  Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed.  That is not good practice.
  • Include a severability provision in your contract. Always.  Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed.