Language in Performance Bond Critical in Determining Surety’s Rights to Complete

Jared Gillman | Saul Ewing Arnstein & Lehr | October 11, 2019

If an owner terminates a contractor due to a contractor default on a bonded project, can the surety hire the same contractor to complete the work under the bond?  Depending on the language of the bond, it may be permissible in Florida.

Recently, in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, No. 3D18-1337, 2019 WL 4850194 (Fla. 3d DCA Oct. 2, 2019), a Florida appellate court ruled that the unambiguous terms of an AIA A312 Performance Bond permitted a surety to propose a previously-terminated contractor as the “replacement contractor” under a Takeover Agreement.

The AIA A312 Performance Bond provided that the surety was required to exercise one of the following series of options upon a contractor’s default:

“4.1 Arrange for the contractor, with consent of the owner, to perform and complete the Contract; or 

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or…”

The surety elected to complete the contract itself pursuant to Section 4.2 of the Bond, and presented a Takeover Agreement to the owner.  The Takeover Agreement provided that the defaulted contractor would complete the project for the surety.  The owner refused the Takeover Agreement because it would not consent to the terminated contractor completing the work on the project.

The appellate court held that the terms of Section 4.2 were unambiguous, and lacked the consent requirement of Section 4.1.  Therefore, the court would not read into Section 4.2  a consent requirement, and held that the surety’s refusal to provide another replacement contractor was not a breach under the terms of the bond.

The owner also argued that the surety could not complete the project itself under Section 4.2 because it was not a licensed contractor.  However, the appellate court rejected this argument, holding that the surety did not need to be a licensed contractor to enter into the Takeover Agreement.

Like any construction contract, it is important to understand the terms contained within a performance bond.  Had the owner successfully modified the terms of the bond to require its consent to a replacement contractor, the dispute (and the resulting legal fees) could have been avoided.

Bad faith legislation: Good for insurance policyholders?

William G. Passannante | PropertyCasualty360 | September 12, 2019

When an insurance company violates its duty of good faith and fair dealing, a policyholder should have a remedy for the insurance company’s breach of duty.

In order for insurance purchasers to receive the benefit of their insurance policies, bad faith behavior by insurance companies requires that a remedy be available. A July 2019 NU PropertyCasualty360 column by a lobbyist for the insurance industry articulated an insurance industry creed: “Plainly and simply, bad faith legislation is solely for the benefit of the plaintiffs’ attorneys.”

Is that somewhat alarmist declaration really so?

Skewed incentives require bad faith balancing

When an insurance company violates its duty of good faith and fair dealing, should a policyholder have a remedy for the insurance company’s breach of duty? The answer must be “Yes.” Bad faith legislation, like common law duties, helps policyholders obtain the benefit of the policies they buy. In the absence of such a remedy, insurance companies will breach their obligations with virtual impunity, because breaching their duties will be almost without cost.

Commentators addressing the damages available for breaches of contracts have been noting the need for a remedy for over half a century. When a contracting party willfully breaks its promise to perform because performance, as promised, would cost more than the damages recoverable in an action for breach of contract, courts have shown a willingness to take the willfulness of the breach into account in determining the damages awardable against the breaching party.

Because the insurance product is in the nature of an aleatory (that is, uncertain) promise — the insurance policy is sold and paid for long before performance of the insurance company is needed — an incentive is created for an opportunistic breach of that long-term promise to pay. Over the years commentators have observed that this “money for promise” arrangement in insurance provides a powerful strategic tool for insurance companies to use against their customers.

The argument that insurance purchasers should have remedies that balance this distorted strategic advantage has been updated continually, including this year, as noted in the Restatement of the Law of Liability Insurance. Though insurance companies and their lobbyists would prefer that policyholders not have redress for such wrongs, such redress remains available. Even the American Law Reports (ALR), not a policyholder advocate, concedes as much:

[I]t has been held that the intentional, bad-faith refusal of an insurer to make payments due under an insurance policy constitutes a tortious interference with a protected property interest of its insured, for which damages may be recovered to compensate for all detriment proximately resulting therefrom, including economic loss… resulting from the conduct or from the economic losses caused thereby. Further,… it has been held that,… punitive or exemplary damages may be recovered from an insurer guilty of wrongfully delaying or refusing to make payments due under an insurance contract, in addition to the awarding of consequential damages. [What Constitutes Bad Faith on Part of Insurer Rendering It Liable for Statutory Penalty Imposed for Bad Faith in Failure To Pay, or Delay in Paying, Insured’s Claim — Particular Conduct of Insurer, 115 A.L.R. 5th 589.]

Consequential damages and attorneys’ fees

Among others, three types of damages available to policyholders help correct the strategic imbalance between insurance company and policyholder at the time an insurance claim is made:

  1. Damages for a failure to settle;
  2. Recovery of attorney’s fees in the insurance recovery action; and
  3. Consequential damages from the breach of the insurance policy.

Even New York, which remains a jurisdiction protective of insurance companies, recognizes claims against insurance companies for bad faith failure to settle. In New York, “a bad faith case is established where the liability is clear and the potential recovery far exceeds the insurance coverage.” [DiBlasi v. Aetna Life and Cas. Ins. Co., 147 A.D.2d 93, 98 (App. Div. 2d Dep’t 1989).]

[T]he law imposes upon the carrier the obligation of good faith which is basically the duty to fairly consider the insured’s interests as well as its own in making the decision as to settlement.  In arriving at a workable standard so that the concept could be clear to a juror,…  Was it highly probable that the insured would be subjected to personal liability? [DiBlasi, 147 A.D.2d at 99.]

Further, many jurisdictions have awarded attorneys’ fees to policyholders forced to litigate with their insurance companies when coverage was clearly indicated. A policyholder “who is ‘cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations’ and who prevails on the merits, may recover attorneys’ fees incurred in defending against the insurer’s action.” [Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979)]. In fact, as my colleague Vivian Michael and I previously have written, most states provide some form of potential recovery of attorneys’ fees when a policyholder is forced to litigate with its insurance companies.

Consequential damages for breach of an insurance policy also are available to policyholders facing wrongful denials. [See Bi-Economy Market, Inc. v. Harleysville Ins. Co., 10 N.Y.3d 187 (2008).] In the Bi-Economy Market case, an insurance company’s long delay followed by partial payment of a claim following a fire loss was found to have led to the company’s death. The New York Court of Appeals awarded consequential damages.

Most policyholders battle adverse claimants and the plaintiffs’ bar. The availability of remedies for insurance company breaches of duty is far from a radical benefit solely for plaintiffs’ attorneys. Rather, in the system of risk transfer embodied in the Western insurance and liability markets, the availability of such remedies corrects a strategic imbalance and un-tilts the playing field somewhat, permitting policyholders to obtain the benefits of the insurance product that they paid hard-earned premium dollars to obtain.

Washington Supreme Court Holds Claims Adjusters Cannot Be Personally Liable for Bad Faith

Jordan Hess and Terri Sutton | Cozen O’Connor | October 9, 2019

In a closely contested 5-4 decision, the Washington Supreme Court held in Keodalah v. Allstate Insurance Company, et al., Slip. Op. No. 95867-0, ___ P.3d ___ (Oct. 3, 2019), that a claims adjuster cannot be held personally liable to an insured for bad faith. Reversing the Court of Appeals, the Supreme Court found that claims adjusters owe no statutory or common law duty of good faith to the insured, the breach of which Keodalah argued supported his claim against an individual adjuster for personal liability for alleged bad faith. The dissenting justices, not unexpectedly, would have permitted such claims. 

FACTS

An uninsured motorcyclist collided with Keodalah’s vehicle at a controlled intersection. Keodalah suffered significant injuries. Although the motorcyclist had the right of way, the police concluded that the motorcyclist’s excessive speed caused the collision and that Keodalah was not using his cellphone at the time of the accident. Allstate’s accident investigator concurred with the police’s conclusions. Keodalah requested the full $25,000 policy limit under his Allstate UIM coverage. Asserting that Keodalah was 70 percent at fault, Allstate offered only $1,600. Keodalah sued Allstate for policy limits. During discovery, Allstate’s claims adjuster, Smith, initially testified that Keodalah ran a stop sign and was on his cellphone; but later recanted those assertions. At trial, the jury found that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20. Keodalah then filed a second lawsuit against Allstate and Smith for bad faith under Washington’s Insurance Fair Conduct Act (IFCA), Consumer Protection Act (CPA), and the common law. Smith moved to dismiss the lawsuit because no duty of good faith applies to claims adjusters. The trial court agreed and dismissed Smith from the suit. The Court of Appeals reversed the trial court’s dismissal of the CPA and common law claims based on RCW 48.01.030 that imposes a duty of good faith on “all persons” engaged in the “business of insurance,” including insurers and insureds. The appellate court reasoned that the statute imposed a duty of good faith on all persons engaged in the business of insurance, and that a breach of that duty gave rise to a private cause of action for bad faith against such persons or entities, including personal liability against claims adjusters. The appellate court also held that breaches of Washington’s insurance regulations constituted per-se violations of the CPA. The Court of Appeals did affirm one of the trial court’s dismissals: Keodalah’s IFCA claim; holding the IFCA does not permit insureds to sue for breaches of the Insurance Code under prior Supreme Court precedent. 

SUPREME COURT REVERSAL 

The Supreme Court reversed the appellate court’s holdings regarding the CPA and common law claims. The settled law in Washington is now that individual claims adjusters cannot be held personally liable for bad faith under the main levers of Washington’s punitive bad faith regime: Washington’s Insurance Code, IFCA,1 or the CPA.  The Supreme Court held that insureds may not sue under RCW 48.01.030 because the statute protects the whole public interest — not the interest of any single individual — the legislature intended only the Insurance Commissioner to enforce the Insurance Code and has given him or her a variety of tools to do so, and creating a private cause of action would not further the statute’s purpose of “preserving inviolate the integrity of insurance.” On this last point, the court noted that although it may seem that permitting private suits may better enforce the Insurance Code, interpreting RCW 48.01.030 to permit private suits would allow insurers to sue insureds for bad faith as the statute’s good faith duty is equally imposed on insureds.  Prior to the Supreme Court’s decision in Keodalah, policyholder counsel sought to expand the class of individuals subject to bad faith claims to include insurance agents and insurance defense and coverage counsel, who were alleged to be “engaged in the ‘business of insurance.’” The Keodalah opinion should effectively preclude any further attempted expansion. Keodalah’s CPA claim was likewise dismissed because Smith had no duty to Keodalah. The court rejected Keodalah’s argument that violations of the Insurance Code were per-se violations of the CPA, instead holding that because the Insurance Code provisions Smith purportedly violated only apply to insurers and Smith was not an insurer, the CPA had no application to a claims adjuster. Further, the court held that an insurer’s duty of good faith under Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381 (1986), could not support a CPA claim because the claims adjuster was not part of the “quasi-fiduciary” relationship between the insured and the insurer supporting that duty. Although the dissenting justices disagreed with much of the majority’s statutory analysis, their most poignant argument was that a claims adjuster should have a duty of good faith to insureds given an adjuster’s crucial role in claims handling. The dissenters argued that the “high stakes and an elevated level of trust are clearly implicated by the work of a claims adjuster[.]” Although the adjuster may not always be the decision-maker regarding coverage, that “decision is directly informed by the work of the claims adjuster.” Therefore, the dissenting justices would have created a common law duty of good faith running from adjusters to insureds. Notably, the dissent agreed with the majority’s holding concerning IFCA’s inapplicability to claims adjusters.  Regardless, the majority’s decision forecloses bad faith claims against claims adjusters and others employed by insurers. 

Adjusting to Public Adjusters: Avoiding Claim Denials

Gene A. Weisberg | Gladstone Weisberg | September 25, 2019

Innocent policyholders can find their claims denied if their public adjuster commits fraud on a claim.

Courts routinely hold that a public adjuster’s fraud is the policyholder’s fraud, even when done without the policyholder’s knowledge. When a public adjuster or lawyer takes over the claim presentation for the policyholder, and supplies false or inflated claim information, there may be sufficient grounds to void the policy or enforce a misrepresentation or concealment policy exclusion.

The focus on fraud investigations typically is whether the policyholder has misrepresented or concealed a material fact in connection with the claim presentation.

However, when a public adjuster is retained, communications typically go through him or her. General agency law binds the policyholder to what the public adjuster or attorney represented on the policyholder’s behalf, even if the policyholder does not know or understand what is occurring. This is because under agency law, an agent’s actions are considered to be the principal’s actions. Thus, if the public adjuster or lawyer is committing fraud, as a matter of law so is the policyholder client.

Most public adjusters are honest. Yet a persistently large number fraudulently inflates repair claims to increase their own fees, which are a percentage of the insurance payout. This problem is magnified when adjusters try to exploit anxious policyholders after major storms sweep through regions.

If the claim submission includes claims for amounts for which there is no proper basis, such that it meets the standard of intentional misrepresenting or concealing of material facts, this could impact the policyholder’s right to recover any amount. Thus, policyholders are well-advised to pay attention to what the public adjuster does on their behalf, ask questions and otherwise make sure they know what is being represented on their behalf.

Public-adjuster fraud a large concern

Such scams are expensive lessons for policyholders. The fraud provides an important reason for policyholders to stay alert, aware and involved throughout the life of a claim. Innocent policyholders can find themselves forced to pay for significant damage repairs out of pocket when their insurer denies a claim.

Insurers also must stay alert, and work to detect repair scams by public adjusters and lawyers before the claims spiral into costly lawsuits that consume time and money, while also breeding ill will.

Public-adjuster fraud thus remains a significant concern for insurers and their policyholders around the U.S. The home damage can be acute. Policyholders are distraught and often vulnerable to come-ons by public adjusters they hire to help handle their damage claims.

National statistics on public-adjuster fraud are in short supply. The arrests/convictions database of the Coalition Against Insurance Fraud, however, lists 133 records about public-adjuster fraud cases specifically, and 705 fraud articles about adjusters generally.

“The court ordered all payments that the company had made were to be repaid, with interest, because of the public adjuster’s fraud.”

Because an agent’s actions are considered to be the principal’s action, when a public adjuster, who acts as the insured’s agent, fraudulently inflates a claim, even if the policyholder did not know it was inflated, it still is fraud when the public adjuster knew. Several states apply this rule in different contexts to public adjusters and lawyers, and recent civil cases reinforce the general rule.

In New York, a policyholder had to repay money the insurer paid for an inflated claim.1 The public adjuster and a company adjuster worked together to make and pay inflated claims, an arrangement for which both later were criminally convicted. The insurance company sued to recover from the insured all amounts paid on the claims, not only the inflated portions but the entire claim. The court ordered all payments that the company had made were to be repaid, with interest, because of the public adjuster’s fraud.

The court relied on the “well-settled rule that a principal, even if innocent, is liable for acts of fraud that are within the scope of an agent’s actual or apparent authority.” The court explained that this general principle applies in the insurance context:

[A] principal who has expressly or impliedly appointed another person to make proof of loss under an insurance policy is barred from recovery, under a policy which provides that it shall be void for fraud or false swearing of the insured after the loss, where the agent is guilty of fraud or false swearing in or in connection with the proof of loss; and this is so even though the insured is ignorant of the misrepresentation and innocent of any intent to deceive or defraud, and [even when] the act of the agent is to the detriment rather than the benefit of the insured.2

The insureds in Chubb v. Consoli argued that public adjusters should be exempt from general agency principles. The court held that there is no reason to justify such an exemption.

More recently, the Federal Court of Appeals in Colorado rejected an argument that a public adjuster’s submitting an inflated claim without the policyholder’s knowledge is outside the scope of the public adjuster’s agency and adverse to the policyholder’s interest, as the insured sought a ruling that he was not bound by the public adjuster’s fraud.3 The court ruled that it was proper to instruct the jury that the policyholders hired the public adjuster and lawyer “to act as their agents in connection with their insurance claim”, and that “the general agency rule that ‘[t] acts or omissions of the public adjuster and attorney are the acts or omissions of the plaintiffs.’”4

The insureds sought to modify that jury instruction to say that only “legal and authorized” acts or omissions of the public adjuster and attorney were the insured’s acts, based on a theory that a principal is not responsible for the agent’s intentional crimes. The court rejected this argument.

Unlike the New York case, where the claim was paid before the fraud was discovered, in the Colorado case, the insurer was suspicious of the claim.

“The insureds fired the public adjuster and attorney after growing suspicious of their integrity.”

The amount claimed greatly exceeded its experts’ evaluation, and the insurer’s engineer determined that the fire that was the subject of the claim did not cause any of the claimed losses. The insureds fired the public adjuster and attorney after growing suspicious of their integrity. Despite all of these factors, the court held that it was proper to give a jury instruction stating that the policyholders were bound by the public adjuster’s acts or omissions.

In both of these cases, the policyholders signed sworn statements in proof of loss, that the public adjuster prepared, claiming inflated amounts. This was a factor in the courts’ determining that fraud was established.

N.Y. court upholds claim denial

In another New York case, the court affirmed a summary judgment for the insurance company when the claim was denied based on misrepresentation and concealment of material facts when a proof of loss, including duplicative items, was submitted.5 The court found that the proof of loss included duplicative items, items in which it demonstrably had no insurable interest, and claimed loss for debris removal expense it later admitted were never incurred. Moreover, even if these items were put aside, of the nearly $675,000 remaining claimed losses, only $275,000 were supported.

The court stated “[o]vervaluation of insured property raises a presumption of fraud in proportion as to the excess, and such presumption becomes conclusive where, as here, the insurer demonstrates that the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation …”6

The insured sought to attribute the overvaluation solely to its public adjuster. The court said that even if that were true, the public adjuster was acting within the scope of his authority when he submitted the claims. The fact that the insured signed the proof of loss, and was the primary beneficiary of the representations in the proof, also were factors. After all, although public adjusters are paid more when the claim payment is higher because they receive a percentage of the policy benefits paid, the majority of the claim payment goes to the insured.

Court: Public adjuster fraud is insured’s fraud

In Washington State, a Federal District Court similarly found that fraud by the policyholder’s public adjuster was fraud by the insured. This warranted claim denial and the right to a refund of money paid on the claim before the fraud was known.

Quick Tips on Effective Construction Quality Control

Alexander G. Thrasher | Bradley Arant Boult Cummings | October 3, 2019

Quality control (QC) programs and reporting are not new to the construction industry. Engineers’ and owner’s specifications, and even manufacturers’ product data sheets, make clear what procedures must be followed and what records must be prepared to ensure that specified quality requirements are met or are within acceptable limits. Contractors are used to filling out QC reports to document environmental conditions, equipment operating parameters, and the work activities performed on site each day. The advancement of QC software and other technologies make it easier than ever to continuously monitor and record environmental, material, and other relevant conditions. Both contractors and owners should embrace the benefits associated with a top-notch QC program and diligent completion of QC reports, but they should be equally aware of the pitfalls that can arise when this aspect of a project is mismanaged and a legal dispute arises.

To resolve a dispute, lawyers must evaluate facts related to a project in terms of claims made by each side and the potential defenses and counter-arguments to those claims. If or when disputes arise on a project, the existence or absence of a QC program and QC reports (along with what is written or not written on them) can be compelling evidence that either helps or hurts your position. Although it is never the goal to end up in litigation or another dispute resolution proceeding because of your work on a project, it is helpful to consider whether your QC program would aid or damage your case in such a proceeding. Here are three points to always remember:

  • Your program on paper is only as good as your program in the field. A QC program that looks great on paper might do wonders to help you win a project. But that same program, if poorly implemented, can cost you thousands, or more, if it is not executed as intended. Put thought into your QC program. It is easy to establish a practice on paper because it is an owner requirement or necessary to obtain an industry certification. But if you are not able and willing to implement the requirement, what seemed like a gold star in your favor at bid time can damage your credibility and can be used to draw inferences against you in court. It is often worse to create a program or plan that says you will do something and not do it, than to never have said anything at all. Take time to review your QC program, and make sure you and your employees are executing your work in accordance with your program.
  • Train your employees well, train them often, and verify training effectiveness. Your program must be more than a commitment by the owners or upper management of the company. In fact, more than anything, it must be a daily commitment by your employees in the field. Train employees on the program, and set expectations for what it looks like to implement the program in the field. Think about the information that needs to be included on daily QC reports or in superintendent log books. Think about times when it makes just as much sense to record activities that did not happen on a given day as those activities that did and why. Be consistent with when and how you record this information. Remember, the absence of a record can be just as compelling as the existence of one in certain situations. Make sure your project managers review these documents regularly. If there is a problem in the reporting, you need to correct it as soon as possible. Make sure records are stored so they are easy to locate and review and protected from loss or damage. Finally, make sure you have a document retention policy in place (and that you follow it, as well).
  • Do not be afraid to call on legal counsel. Do not shy away from seeking guidance on the legal risks associated with your business or a project. I know, I know — no one ever wants to get lawyers involved, and you certainly do not want lawyers dictating how to run your businesses. But as the saying goes, an ounce of prevention is worth a pound of cure. The right lawyer can add value to your business and make you more profitable. Rational contractors do not want to litigate disputes. They would much rather do the job they contracted to do, get paid, and move on to the next project. Proactive clients who contact their legal counsel about issues that might arise in the future often come out ahead of clients who wait to call until there is a real mess and a lot of damage has already been done. Whether it is a QC program, a contract, or a safety issue, lean on the legal resources at your disposal. Engage your attorney to conduct a review of your programs or to present needs-based training to your team for legal perspective on discrete topics that affect your business.