Economic Loss Not Property Damage

Tred R. Eyerly | Insurance Law Hawaii | August 26, 2019

    The Fifth Circuit agreed with the district court that the insured subcontractor’s economic losses did not amount to covered property damage. Greenwich Ins. Co. v. Capsco Industries, Inc., 2019 U.S. App. LEXIS 23949 (5th Cir. Aug 12, 2019).

    Capsco Industries, Inc. was a subcontractor on the construction of a casino. Capsco subcontracted with Ground Control to install water, sewage, and storm-drain lines. Ground Control was terminated from the project by the general contractor for alleged safety violations and failed drug tests of its employees. Ground Control sued in state court against multiple parties, including Capsco, seeking payment for work on the project. The claims were dismissed on summary judgment because neither party had obtained the required certificates of responsibility from the state, making the parties’ contract void. The Mississippi Supreme Court agreed the contract was void, but reversed and remanded for further proceedings based solely on theories of unjust enrichment and quantum meruit.

    While the state case was on remand, Capsco’s liability insurers, Greenwich Insurance Company and Indian Harbor Insurance Company, filed a compliant for declaratory judgment in federal district court seeking a declaration that they did not owe a defense or indemnity to Capsco. The defendants were Ground Control, Capsco, the general contractor, and the casino owner. The latter two parties were dismissed. Ground Control counterclaimed for coverage of its claims against Capsco. The district court stayed proceedings until the state court litigation ended. 

    In state court, a jury awarded Ground Control over $825,000 in damages against Capsco, later reduced to $199,096 by remittitur. The district court then found the two insurers did not owe Capsco a duty to defend. 

    Subsequently, on summary judgment, the district court held that no indemnification was due and it entered final judgment. Ground Control appealed. Ground Control acknowledged that it had no evidence that would support indemnity during the period of Indian Harbor’s policy. Thus, its claim on the duty to indemnify applied solely to Greenwich.

    The Greenwich policy required the insured to pay for property damage, which the policy stated was either actual damage to physical property or the loss of its use. Purely economic losses were not included in the definition of property damage.

    Ground Control argued must of the work it performed under the void contract was to repair physical property. But the Mississippi Supreme Court limited Ground Control’s award to the value of what it expended in labor and supplies on the project. Ground Control claimed that under the void contract, it incurred expenses for labor and supplies to make repairs to physical property. There was no coverage for these expenses, however, unless the insured, Capsco, was legally obligated to pay those amounts “as damages because of . .  ‘property damage’ to which this insurance applies.” Capsco was obligated to pay the reasonable value of the services Ground Control provided. It was not paying for property damage or loss of its use; it was paying for labor and materials. Payment for work was a stop removed from paying for property damage that necessitated the work.

    Therefore, the district court was affirmed. 

Admissibility of Expert Opinions in Insurance Bad Faith Trials

David McLain | Colorado Construction Litigation| October 8, 2019

In 2010, Hansen Construction was sued for construction defects and was defended by three separate insurance carriers pursuant to various primary CGL insurance policies.[i]  One of Hansen’s primary carriers, Maxum Indemnity Company, issued two primary policies, one from 2006-2007 and one from 2007-2008.  Everest National Insurance Company issued a single excess liability policy for the 2007-2008 policy year, and which was to drop down and provide additional coverage should the 2007-2008 Maxum policy become exhausted.  In November 2010, Maxum denied coverage under its 2007-2008 primarily policy but agreed to defend under the 2006-2007 primarily policy.  When Maxum denied coverage under its 2007-2008 primary policy, Everest National Insurance denied under its excess liability policy. 

In 2016, pursuant to a settlement agreement between Hansen Construction and Maxum, Maxum retroactively reallocated funds it owed to Hansen Construction from the 2006-2007 Maxum primary policy to the 2007-2008 Maxum primary policy, which became exhausted by the payment.  Thereafter, Hansen Construction demanded coverage from Everest National, which continued to deny the claim.  Hansen Construction then sued Everest National for, among other things, bad faith breach of contract.

In the bad faith action, both parties retained experts to testify at trial regarding insurance industry standards of care and whether Everest National’s conduct in handling Hansen Construction’s claim was reasonable.  Both parties sought to strike the other’s expert testimony as improper and inadmissible under Federal Rule of Evidence 702.
In striking both sides’ expert opinions, the U.S. District Court Judge Christine Arguello set forth the standards for the admissibility of expert opinions in Federal Court:

Under Daubert, the trial court acts as a “gatekeeper” by reviewing a proffered expert opinion for relevance pursuant to Federal Rule of Evidence 401, and reliability pursuant to Federal Rule of Evidence 702.[ii]  The proponent of the expert must demonstrate by a preponderance of the evidence that the expert’s testimony and opinion are admissible.[iii]  This Court has discretion to evaluate whether an expert is helpful, qualified, and reliable under Rule 702.[iv]

Federal Rule of Evidence 702 governs the admissibility of expert testimony. Rule 702 provides that a witness who is qualified as an expert by “knowledge, skill, experience, training, or education” may testify if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.
Fed. R. Evid. 702.

In deciding whether expert testimony is admissible, the Court must make multiple determinations. First, it must first determine whether the expert is qualified “by knowledge, skill, experience, training, or education” to render an opinion.[v]  Second, if the expert is sufficiently qualified, the Court must determine whether the proposed testimony is sufficiently “relevant to the task at hand,” such that it “logically advances a material aspect of the case.”[vi]  “Doubts about whether an expert’s testimony will be useful should generally be resolved in favor of admissibility unless there are strong factors such as time or surprise favoring exclusions.”[vii]

Third, the Court examines whether the expert’s opinion “has ‘a reliable basis in the knowledge and experience of his [or her] discipline.’”[viii]  In determining reliability, a district court must decide “whether the reasoning or methodology underlying the testimony is scientifically valid.”[ix]  In making this determination, a court may consider: “(1) whether a theory has been or can be tested or falsified, (2) whether the theory or technique has been subject to peer review and publication, (3) whether there are known or potential rates of error with regard to specific techniques, and (4) whether the theory or approach has general acceptance.”[x]

The Supreme Court has made clear that this list is neither definitive nor exhaustive.[xi]  In short, “[p]roposed testimony must be supported by appropriate validation—i.e., ‘good grounds,’ based on what is known.”[xii]

The requirement that testimony must be reliable does not mean that the party offering such testimony must prove “that the expert is indisputably correct.”[xiii]  Rather, the party need only prove that “the method employed by the expert in reaching the conclusion is scientifically sound and that the opinion is based on facts which sufficiently satisfy Rule 702’s reliability requirements.”[xiv]  Guided by these principles, this Court has “broad discretion” to evaluate whether an expert is helpful, qualified, and reliable under the “flexible” standard of Fed. R. Evid. 702.[xv]

With respect to helpfulness of expert opinions, Judge Arguello explained:

Federal Rule of Evidence 704 allows an expert witness to testify about an ultimate question of fact.[xvi]  To be admissible, however, an expert’s testimony must be helpful to the trier of fact.[xvii]  To ensure testimony is helpful, “[a]n expert may not state legal conclusions drawn by applying the law to the facts, but an expert may refer to the law in expressing his or her opinion.”[xviii]

“The line between a permissible opinion on an ultimate issue and an impermissible legal conclusion is not always easy to discern.”[xix]  Permissible testimony provides the jury with the “tools to evaluate an expert’s ultimate conclusion and focuses on questions of fact that are amenable to the scientific, technical, or other specialized knowledge within the expert’s field.”[xx]

However, “an expert may not simply tell the jury what result it should reach….”[xxi]  Further, “expert testimony is not admissible to inform the trier of fact as to the law that it will be instructed to apply to the facts in deciding the case.”[xxii]  Similarly, contract interpretation is not a proper subject for expert testimony.[xxiii]

Finding that all three of the experts intended to offer opinions that were objectionable on the basis of helpfulness, Judge Arguello granted both parties’ motions to exclude the expert testimony of the opposing experts. 

[i] Hansen Construction, Inc. v. Everest National Insurance Company, 2019 WL 2602510 (D. Colo. June 25, 2019).

[ii]See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589–95 (1993); see also Goebel v. Denver & Rio Grande W. R.R. Co., 215 F.3d 1083, 1087 (10th Cir. 2000).

[iii]United States v. Nacchio, 555 F.3d 1234, 1241 (10th Cir. 2009); United States v. Crabbe, F. Supp. 2d 1217, 1220–21 (D. Colo. 2008); Fed. R. Evid. 702 advisory comm. notes.

[iv]See Goebel, 214 F.3d at 1087; United States v. Velarde, 214 F.3d 1204, 1208–09 (10th Cir. 2000).

[v]Nacchio, 555 F.3d at 1241.

[vi]Norris v. Baxter Healthcare Corp., 397 F.3d 878, 884, 884 n.2 (10th Cir. 2005).

[vii]Robinson v. Mo. Pac. R.R. Co., 16 F.3d 1083, 1090 (10th Cir. 1994) (quotation omitted).

[viii]Norris, 397 F.3d at 884, 884 n.2 (quoting Daubert, 509 U.S. at 592).

[ix] Id. (quoting Daubert, 509 U.S. at 592–93).

[x]Norris, 397 F.3d at 884 (citing Daubert, 509 U.S. at 593–94).

[xi]Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999).

[xii]Daubert, 509 U.S. at 590.

[xiii]Bitler v. A.O. Smith Corp., 400 F.3d 1227, 1233 (10th Cir. 2004) (quoting Mitchell v. Gencorp Inc., 165 F.3d 778, 781 (10th Cir. 1999)).

[xiv] Id.

[xv]Velarde, 214 F.3d at 1208–09; Daubert, 509 U.S. at 594.

[xvi] United States v. Richter, 796 F.3d 1173, 1195 (10th Cir. 2015).

[xvii] Fed. R. Evid. 702.

[xviii] Richter, 796 F.3d at 1195 (quoting United States v. Bedford, 536 F.3d 1148, 1158 (10th Cir. 2008)); see, e.g., Killion v. KeHE Distribs., LLC, 761 F.3d 574, 592 (6th Cir. 2014) (report by proffered “liability expert,” which read “as a legal brief” exceeded scope of an expert’s permission to “opine on and embrace factual issues, not legal ones.”).

[xix] Richter, 796 F.3d at 1195 (quoting United States v. McIver, 470 F.3d 550, 562 (4th Cir. 2006)).

[xx] Id. (citing United States v. Dazey, 403 F.3d 1147, 1171–72 (10th Cir. 2005) (“Even if [an expert’s] testimony arguably embraced the ultimate issue, such testimony is permissible as long as the expert’s testimony assists, rather than supplants, the jury’s judgment.”)).

[xxi] Id. at 1195–96 (quoting Dazey, 403 F.3d at 1171).

[xxii] 4 Jack B. Weinstein et al., Weinstein’s Federal Evidence § 702.03[3] (supp. 2019) (citing, e.g., Hygh v. Jacobs, 961 F.2d 359, 361–62 (2d Cir. 1992) (expert witnesses may not compete with the court in instructing the jury)).

[xxiii] Id. (citing, e.g., Breezy Point Coop. v. Cigna Prop. & Cas. Co., 868 F. Supp. 33, 35–36 (E.D.N.Y. 1994) (expert witness’s proposed testimony that failure to give timely notice of loss violated terms of insurance policy was inadmissible because it would improperly interpret terms of a contract)). 

Illinois Appellate Court Requires School Board to Pay for Services Rendered Under an Invalid Construction Contract

Brianne Dunn, Respicio Vazquez and Jackie Wernz | Franczek | November 5, 2019

A recent Illinois Appellate Court case appears to have closed a loophole through which some school districts and other public entities have avoided liability for work performed by construction companies under invalid contracts. Although the Illinois Supreme Court has agreed to review the decision, school districts and other public entities should be aware of the potential effects of this case if the decision is upheld.

Restore Construction Company v. Board of Education of Proviso Township High Schools District 209 involved a dispute between a high school district and a construction company for work resulting in approximately $7 million in emergency repairs the company made for the high school after a fire. The repairs were never authorized by the Board of Education or and the contract was not submitted to a competitive bidding process. Rather, the Superintendent first signed a contract with the company. Later, the Board President amended an earlier, Board-approved contract with the company to address the new work; the amendment, however, was not approved by the Board.  Accordingly, neither contract or amendment was competitively bid out or Board approved. 

After paying approximately $5 million to the company for the fire cleanup, the Board refused to pay the remainder due. Relying on earlier court decisions in Illinois holding that a contract cannot be implied “in fact” where the contract was entered into in violation of law, the Board argued that the contracts were void ab initio, or at the start, because they were not entered into in compliance with law, and that no contract could be implied “in fact” without compliance with contractual requirements of the law. 

Here, however, the company sought payment for what it was owed based on equitable principles, not the existence of a valid contract. The Appellate Court held that even though there was no valid contract in place, it would be unjust to allow the school district to retain the company’s services without paying the reasonable value for them. Thus, a contract implied in law could be enforced against the school district.

Prior to this decision through this unusual loophole, public entities could, in some instances, avoid payment for services already provided by third parties. For instance, one case the Appellate Court distinguished in Restore Construction Co. stemmed from work a company performed in excess to the terms of an express contract. In both cases, the company did work that the school district benefitted from, but only in Restore was the school district required to pay for those services. The only distinction appears to be the legal basis under which the company sought relief; in Restore the relief was sought in equity, whereas in the earlier case the company argued that the contract was actually valid.

The Supreme Court has agreed to review the case, so it remains to be seen if the decision will stand. If it does, however, school districts and other public entities should expect this “loophole” to be closed as companies seeking payment for previously completed work should be expected to proceed under theories of equity instead of contract so that they can rely on the precedent in this case.

Can You Rely on a Certificate of Insurance

David Lynch | Construction Law | Kilpatrick Townsend & Stockton | November 4, 2019

Commercial contracts often require that the parties maintain certain liability insurance and that the policies also contain endorsements extending benefits, such as additional insured status and waiver of subrogation. In order to confirm compliance with the contract provisions, parties are generally required to produce a certificate of insurance from the broker stating that the insurance is in place and that the benefits required by the contract are in the policies.

What happens when a loss occurs and it turns out that the policies are not in place or that the benefits, such as additional insured status, are not in the policies? The standard certificate of insurance states that the certificate is issued for information only and confers no rights upon the certificate holder. The certificate also states that it does not amend, extend or alter the coverage described in the document. Is this effective?

In most states the language in the certificate is enforceable and in the event the described coverage does not exist, then no remedies exist against the broker or the insurance company. As the New Hampshire Supreme Court said, “In effect, the certificate is a worthless document; it does no more than certify that insurance existed on the day the certificate was issued.” Bradley Real Estate Trust v. Plummer & Rowe Ins. Agency, 136 N.H. 1, 609 A.2d 1233, 1235 (N.H. 1992). See also Mountain Fuel Supply v. Reliance Ins. Co., 933 F.2d 882, 889 (10th Cir. 1991)(applying Wyoming law); Taylor v. Kinsella, 742 F.2d 709, 711 (2nd Cir. 1984)(applying New York law); Erie Ins. Exchange v. Gosnell, 246 Md. 724, 230 A.2d 467, 469 (1967); Alabama Elec. Co-op., Inc. v. Bailey’s Constr. Co., Inc., 950 So2d 280, 285-86 (Ala. 2006)(reliance on a certificate of insurance is not reasonable in light of disclaimers); Via Net, US v. TIG Ins. Co., 211 S.W.3d 310, 314 (Tex. 2006)(“[T]hose who take such certificates at face value do so at their own risk”).

Recently the Washington Supreme Court held to the contrary. T-Mobile USA, Inc. v. Selective Ins. Co. of America, 2019 WL 5076647, *7 (Wash. 2019)([A]n insurance company’s agent who makes an authoritative representation binds the insurance company, even when that specific representation is transmitted via a certificate accompanied by general disclaimers”). It should be noted that in T-Mobile the Court found that the broker had apparent authority to act on behalf of the insurance company.

The result of the majority view requires that in order to verify that another party’s insurance policies comply with the requirements in a contract the policies themselves should be reviewed. Unfortunately, many companies are unwilling to provide their policies for review. A further difficulty is that, even if the policies were provided, insurance policies are difficult contracts for a lay person to construe.

A second alternative, one that has been gaining use, is to require that the certificate of insurance include copies the portions of the policy which show compliance with the contract requirements. This would include, at a minimum, the additional insured, wavier of subrogation, and primary and non-contributory endorsements, and potentially the declaration page and the schedule of forms and endorsements. Again, these policy provisions are often difficult for a lay person to construe.

Contractors Struggle with Cash & Difficult Payment Terms, Could Benefit From Legal Advice, According to New Survey

Scott Wolfe | Construction Law Musings | October 18, 2019

Getting paid in construction is slow, hard, and stressful, according to a survey conducted by Levelset & TSheets by Quickbooks that polled over 500 construction professionals. Half of the contractors surveyed complained that they did not get paid on time, which caused serious cash flow issues that negatively impacted their customer relationships and frequently forced them to dip into personal savings and lines of credit to keep their business afloat. View the 2019 Construction Payment Report here.

Unfortunately, since the construction industry’s slow payment problems are well-documented, this sad reality isn’t too surprising. The findings, though, do demonstrate a massive cash crunch for the 1.5 million+ contractors in the United States, and underscores the importance of having legal help and counsel from a construction lawyer before, during, and after jobs.

Payment struggles are the status quo for contractors

Dealing with payment struggles is not something that afflicts only some contractors. The Levelset & TSheets survey demonstrates that cash and payment struggles affect nearly every contractor, and managing these payment challenges is a day-to-day reality for them.

Here are some eye-opening stats from the report:

  1. Contractors don’t get paid on time:  About half of contractors in the United States reported that they frequently do not get paid on time;
  2. Contractors have to fight for payments: Nearly every contractor (98%) had to threaten a lien recently to get paid, and more than half (58%) had to file a mechanics lien to get paid.
  3. Contractor’s don’t get paid in full:  Almost 40% of contractors frequently do not get paid in full on every job, complaining that back charges, deductions, and other withholdings frequently get tacked on after the job is finished;
  4. Payment & Contract Terms are problematic:  Contractors also report that their contractual terms are problematic for payment. They struggle with retainage requirements, they are forced to take discounts and rarely earn interest for non-payment, and they have to wait

Handling payment challenges requires legal help & experience

It’s interesting that contractors are experiencing payment challenges that really could benefit from legal help & experience.  According to the report, contractors are stressed about issues that could be better addressed by the parties before the job begins, and before payment problems escalate out of control.  And specifically, they could be addressed with some legal assistance.

First, before the job begins, contractors can set themselves up with more attractive payment rights. Of course, it’s always the case that the owner and/or general contractor has a good bit of leverage in contract negotiations, but it is our experience that there is always room for some positive changes to the construction contract.

These changes can mitigate the effects of pay when paid or pay if paid provisions and improve payment timing, or position your company to have less retainage withheld or to shorten the time of withholdings.

Before the job begins, legal counsel can also help you better understand what you can expect on the job. Knowing what to expect can be extremely helpful to manage cash flow expectations. Counsel can help you understand the likely payment scenarios you will encounter on a job, and even help you read through the payment behaviors of the general contractors on the job to prepare your company to work with the other parties.

Second, after the job is underway, but before payment problems are out of control, legal counsel can help you get the right attention to your claims. This will help contractors get paid without having to resort to threatening a mechanics lien, or worse, to file a mechanics lien.