Experts Regarding Causation Can Be More Important Than Witnesses — or, Don’t Believe Your Lying Eyes When Your Insurance Company Hires an Expert

Chip Merlin | Property Insurance Coverage Law Blog | July 12, 2017

Insurance companies hire all kinds of experts to help them for all kinds of reasons. The problem is that some experts are not honest and never try to find the truth. The other problem is some policyholders or their under-financed attorneys do not hire experts or very good experts.

We have written a number of blogs on these topics which I suggest you read:

I asked you to review the prior posts because Ohio judges found that eyewitness testimony which directly contradicted an insurance company’s expert was to be disregarded.1 Seems bizarre to me, but here is the relevant part of the opinion:

American Family presented the report and affidavit of a structural engineering firm which specializes in evaluating damage and structural issues to buildings, that provided detailed descriptions of the likely cause of each item of damage. For example, it explained that typical evidence of damage due to vibrations, such as chatter, was not present, while evidence of other causes, such as patching, discoloring, and warping showing long-term, progressive damages due to normal weather conditions and aging, was present. Testimony that some cracks appeared during the time of the vibration/construction does not refute these conclusions. Under the facts of this case, the expert report supports a conclusion that the terms of the policy exclude coverage, especially given that expert testimony clarifies the often complex causes of structural damage. . . .

King argues that the affidavits of her lay witnesses show that the foregoing exclusions do not apply because the damages appeared after the vibrations began. Again, these affidavits do not ultimately refute the expert’s conclusion that the damages were of the type that fall under the exclusions. Further, Dixon v. Miami Univ., 10th Dist. Franklin No. 04AP–1132, 2005–Ohio–6499, cited by King for the proposition that, when there is little passage of time between the incident causing damage and discovery of the damage itself and the matter is not speculative, such lay testimony creates an issue of fact, is distinguishable. In Dixon, there was little cause for speculation, since the appellee broke his arm while working (which the appellant did not dispute was caused by its negligence) and a later infection resulted in the area of the fracture. Here, the unrefuted expert report served to show the many complex causes of damages that fall under the exclusions and the neighbor’s affidavits do not serve to refute the explicit language of the insurance policy.

Really! Suppose an insurance company fire expert concluding that excluded arson occurred and said the fire started in a corner of a building while 1023 witnesses said they saw it start somewhere else? I guess in Ohio, judges will tell you to believe the insurance company’s expert and not your lying eyes!

What Does Your Defense And Indemnity Construction Contract Mean In 2017?

Ryan W. Young | Lewis Brisbois | July 12, 2017

California’s longstanding restrictions on defense and indemnity construction contracts have undergone several changes over the years with significant differences based upon the contract execution date. More specifically, the California Legislature enacted Civil Code § 2782 in 1967, and has amended its provisions several times since 2005. Consequently, parties in a construction dispute often ask, “what version of section 2782 applies, and what does it mean to my case?” We’re here to help. This historical roadmap of Section 2782 will lead you to the answer.

Construction Contracts Executed From 1967 to December 31, 2005

In 1967, the California Legislature enacted Civil Code § 2782 to prohibit any construction contract that requires the promisor (the party accepting the indemnity obligation) to indemnify the promisee (the party benefiting from the indemnity obligation) for property damage, death or bodily injury caused by the sole negligence or willful misconduct of the promisee.

As of 2005, Section 2782 prohibited contracts that purport to indemnify the promisee against liability for damages arising from the sole negligence or willful misconduct of the promisee or the promisee’s agents, servants or independent contractors who are directly responsible to the promisee, or for defects in designs furnished by such persons.1 A typical Type I indemnity clause, however, could require the subcontractor to assume liability for the builder/developer/general contractor’s negligence and misconduct beyond the normal tort law principles of proportionate fault. Thus, under Type I indemnity agreements, the only loss not indemnified was for the sole negligence or willful misconduct of the builder/developer/general contractor. Indeed, the subcontractor was required to indemnify a builder/developer/general contractor for the entire loss, even if the developer performed the majority of the negligent work.

Residential Construction Contracts Executed From January 1, 2006 to December 31, 2007

In 2005, the California Legislature set out to address what were deemed unfair indemnity agreements commonly found in construction contracts which shifted liability from the general contractor to the subcontractor. This, in part, was due to the unfair bargaining power of general contractors and the perceived effect such agreements had on general liability insurance rates.

Consequently, the California Legislature amended Section 2782 to prospectively restrict Type I indemnity provisions in residential construction contracts between builders2 and subcontractors, effective January 1, 2006. More specifically, residential construction contracts entered into after January 1, 2006 could not require a subcontractor to indemnify, including the cost to defend, the builder of original construction individual dwellings3 for construction defect claims arising out of the negligence (or defects in design) of the builder, its agents or other subcontractors, or to the extent the claims did not arise out of the subcontractor’s scope of work.

Residential Construction Contracts Executed From January 1, 2008 to December 31, 2008

Effective January 1, 2008, Section 2782 was amended to clarify that the 2006 amendments regarding residential construction contracts would also apply to a general contractor or contractor “nonaffiliated” with a builder.

Residential Construction Contracts Executed From January 1, 2009 to December 31, 2012

In response to builders requiring subcontractors to pay for their defense costs unrelated to the subcontractor’s work, thereby circumventing the intent of the 2006 amendments and the state’s comparative fault principle, the California Legislature amended Section 2782. For residential construction contracts executed on or after January 1, 2009, a subcontractor has no defense or indemnity obligation to the builder or general contractor in a construction defect action unless and until the builder or general contractor provides a written tender of the claim to the subcontractor. Thereafter, the subcontractor is required to elect to either (1) provide a complete defense of all claims alleged to be caused by the subcontractor, or (2) pay the builder or general contractor the reasonable allocated share of the builder’s or general contractor’s defense fees and costs, on an ongoing basis with shares allocated to each subcontractor and/or the builder or contractor itself.

All Construction Contracts Executed On Or After January 1, 2013

The California Legislature placed further restrictions on construction contracts through its passage of Senate Bill No. 474 which applies to contracts executed on or after January 1, 2013.

Civil Code § 2782 now renders void and unenforceable any construction contract with a public entity or private property owner that purports to relieve a public entity or private property owner for its active negligence or to shift such liability to a contractor, subcontractor or supplier of goods or services. This prohibition only applies to owners that are not acting as a contractor or supplier of materials.

Non-Residential Construction Contracts Executed On Or After January 1, 2013

Non-residential contracts executed on or after January 1, 2013, that require a subcontractor to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor against liability for claims of property damage, death or bodily injury are now void and unenforceable where such claims arise out of the active negligence or willful misconduct (or defects in design) of that general contractor, construction manager, or other subcontractor (or their agents), or to the extent such claims do not arise out of the subcontractor’s scope of work under the construction contract. 4

We will continue to follow developments in Section 2782 and will report on changes to the law and relevant cases in future editions of this newsletter. Although you should always seek legal advice as to your particular case, we provide the following chart for ease of reference.

Footnotes

1 Section 2872 also prohibits construction contracts with a public agency which imposes on the contractor, or relieves the public agency from, liability for the active negligence of the public agency.

2 “Builder” means any entity or individual, including, but not limited to a builder, developer, general contractor, contractor, or original seller who, at the time of sale, was also in the business of selling residential units to the public for the property. “Builder” did not include any entity or individual whose involvement is limited to his or her capacity as general contractor or contractor and who is not a partner, member of, subsidiary of, or otherwise similarly affiliated with the builder. These nonaffiliated general contractors and nonaffiliated contractors were treated the same as subcontractors, material suppliers, individual product manufacturers, and design professionals. Cal Civ. Code § 911.

3 See, Civil Code § 896.

4 See Civil Code § 2782.05 for exclusions including, but not limited to, direct contracts with public agencies, owners of private property, design professionals, and any wrap-up insurance policy. 

Construction Mediation (Often) Isn’t About Money

Christopher G. Hill | Construction Law Musings | July 4, 2017

Did the title of this week’s Musings get your attention? I hope so. If it didn’t, maybe I should say it again. Mediation (often) isn’t about money. I know, you thought that the bottom line in litigation or other dispute resolution (particularly in the construction field) was money. Before I added “construction mediator” to the services that my firm provides, I thought so too.

In my role as a construction litigator and counselor for and to contractors and subcontractors, the rules of the road required a focus on the contract (because that determined the basic rules), what work was done and who owed (or would owe) money. I knew that, if the matter got to court, only a limited number of the facts and circumstances that lead to the dispute would be relevant. I also knew that, for the most part, the emotions, previous relationship of the parties, and many other things that could be important to the individuals presently squaring off in court (or arbitration) would not see the light of day. For these reasons, aside from listening carefully to the full narrative from my own client, these non-contractual/non-monetary factors did not really play a part in the world of commercial construction litigation.

Even participation in mediation as counsel for one of the parties only gave me a glimpse of the possible non-monetary factors that lead to a seeming purely monetary dispute. When representing one side or the other, we construction attorneys (or at least I) tend to focus on the numbers and the potential court result. Based on my (or the mediator’s) assessment of the risks of litigation coupled with the possible recovery I advised my client on the range and adequacy of any potential settlement. Rarely did my thinking move away from this type of calculus.

Much of that has changed since I have become a certified Virginia Supreme Court mediator. During the training and subsequent service as a mediator in various courthouses in Virginia, I began to realize that money may not be the sole reason the dispute was not resolved short of attorney or court intervention. Quite often the parties have completely different views of the other side than the attorneys that represent them.

I realized that mediation (as opposed to litigation) allows the parties and the mediator to explore avenues of discussion and resolution that simply are unavailable in any other form of “formal” dispute resolution. Rules of procedure and evidence do not apply. The result need not be one side wins, the other loses. The parties can discuss everything from the phone call that wasn’t returned to the fact that they felt slighted on an occasion completely unrelated to the matter at hand. Would this sort of “evidence” be admissible in court? Of course not. But in mediation, this “evidence” may very well resolve the matter.

Does all of this mean that money, risk and reward are never discussed? Of course not. The parties to a construction dispute will eventually get down to money and who will pay and how. Their attorneys will need to advise them on the propriety of any settlement offer before any mediated agreement will be signed. However, I have learned that in many cases (if not most) the non-monetary, legally irrelevant “facts” are often the ones that need to be aired and dealt with to allow the business owners in a construction dispute to resolve their disputes.

The flexibility of mediation and the ability to move beyond the strictures of the rules and procedures of the courtroom, in my mind, is one of the reasons that I have found mediation to be such a successful alternative dispute resolution mechanism both in my role as attorney and my role as mediator.

Court Upholds Policy Suit Limitations Provision and Holds Appraisal Award Unenforceable for Failure to File a Timely Lawsuit

Nicole Levine | Property Insurance Coverage Law Blog | July 16, 2017

This blog has often discussed the importance of carefully reading your insurance policy. It is imperative to know of your rights should your insurance claim become problematic. It is crucial to know the policy’s suit limitation clause as well as your state’s statute of limitations, so you don’t miss the filing deadline. Once this period of time lapses, your right to sue and recover your unpaid or underpaid loss is waived.

MZM Real Estate Corp v. Tower Insurance Company of New York,1 is a recent New York case that demonstrates the importance of filing a timely lawsuit. The court followed the general rule that most courts will uphold all reasonable suit limitations periods unless the insurer extends or waives this period. Here, MZM sought coverage for wind damage caused by Superstorm Sandy. MZM was not satisfied with the insurers’ payment of $4,000, so they invoked their right to appraisal under the terms of the policy and served the insurer with a $170,129.96 appraisal award. Insurer denied the appraisal award for several reasons and MZM filed suit to enforce the appraisal award. The lawsuit commenced approximately six months after the tolling of the policy’s two-year suit limitation clause. The insured argued the filing was timely because completing the appraisal process was a condition precedent to filing suit. The insurer defended the denial by asserting that the suit was barred as untimely as nothing in the policy specifies that once appraisal is invoked, it must be completed before the commencement of a lawsuit.

The court agreed with the insurer and determined that “MZM cites no authority and the Court has not found any to support the proposition that under the facts similar to this case, once an appraisal is demanded, the completion of the appraisal serve as a condition precedent to the commencement of an action.” The court also found it was “uncontroverted that MZM never requested a waiver of the limitation period or an extension of time.” Furthermore, “an insured can protect itself by either beginning an action before the expiration of the limitation period or obtaining from the carrier a waiver or extension of its provisions.”

This case exemplifies the importance of understanding the insurance policy time limitations as well as the statute of limitations. Failing to file a timely lawsuit can have disastrous results by barring recovery for a loss that might have otherwise been covered under the terms of the policy.
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1 MZM Real Estate Corp v. Tower Ins. Co. of New York, 2017 NY Slip Op 30691(U) (Apr. 7, 2107).

2016: A Busy Year for the Supreme Court of Virginia, Including 2 Significant Decisions for the Construction Industry

Joseph R. Pope and Robert K. Cox | Williams Mullen | July 5, 2017

If you are a design professional providing services in Virginia, or a general contractor on a public works project for the Commonwealth of Virginia, you need to know of two Virginia Supreme Court decisions in 2016. You ask why? The answer is because your current practices and protocols may expose you to the same risks and liabilities that the design professional and general contractor experienced respectively on the projects the Virginia Supreme Court addressed in its two decisions. Now is the time to learn of these decisions and to review and, if appropriate, modify your practices to avoid the same risks and liabilities.

The first decision is William H. Gordon Associates, Inc. v. Heritage Fellowship Church, 291 Va. 122, 784 SE2d 265 (2016), which involved an array of construction issues, including the duty of care that design professionals owe when preparing construction plans and specifications. The second decision is Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc., 791 SE2d 734 ( Va. 2016), in which the Court limited the effect of the general contractor’s flow-down clause in its subcontracts and rejected the general contractor’s indemnity claim against its subcontractor.

William H. Gordon Associates, Inc. v. Heritage Fellowship Church, and A Design Professional’s Duty of Care

In this case, Heritage, a church located in Reston, Virginia, contracted with the Gordon firm to provide engineering services for the site on which the Church’s new sanctuary would be built. The services included designing a storm water management system for the site. The Gordon engineer assigned to the project selected a rain tank system that was relatively new to the industry. Unfortunately, the engineer had no experience with the system and “cut and pasted” the plans and specifications for the rain tank system that the rain tank vendor had provided into the design documents for the project. The engineer admitted at trial that he did not fully understand many aspects of the rain tank specifications and plans he “cut and pasted” into the design documents.

While installing the rain tank system, the building contractor became concerned that the system was ill-suited for the site and requested additional information. Relying on information that the rain tank vendor provided, the Gordon engineer dismissed the contractor’s concerns. The contractor proceeded to install the rain tank system and then paved over the installation as part of the construction of a new parking lot. Shortly after that installation and paving, the rain tank and parking lot above it collapsed. The Church sued the general contractor and engineer for the damages caused by the collapse, including the cost to install a new storm water management system.

Following an eight-day bench trial with over 20 witnesses, the trial court ruled that the engineer Gordon breached the duty of care because its engineer merely “cut and pasted” the rain tank’s product specifications into the design without “understand[ing] the specifications.” Despite evidence showing that the contractor did not strictly or fully comply with Gordon’s plans, the trial court concluded that Gordon’s breach of the standard of care was the proximate cause of
the collapse.

Gordon appealed the ruling on the narrow ground that the evidence was insufficient to establish that any breach of the professional standard of care proximately caused the rain tank to collapse.

The Supreme Court affirmed the trial court’s ruling on the issue, concluding that there was sufficient evidence to establish that the engineer violated the standard of care and the breach was the proximate cause of the rain tank collapse and the resulting damage. The Court noted that Heritage offered expert testimony that Gordon breached the standard of care by (1) incorporating the manufacturer’s unverified literature into the design, (2) failing to fully understand the design, (3) failing to consider the unusually high water table, (4) failing to provide quality oversight during construction to ensure that the elements of the plan were being verified and executed, and (5) failing to reexamine the original plan when the contractor requested information from the engineer. The Court also found the evidence sufficient to support the trial court’s finding that the breach of the standard of care was the proximate cause of the rain tank collapse.

Design professionals and project owners should note that the Supreme Court’s ruling was closely tied to the particular facts of the case, and, because the appeal was from a bench trial, the trial court’s ruling could not be disturbed so long as there was some evidence in the record to support the judgment. Based on these circumstances, the Court had no difficulty concluding that there was an evidentiary basis for the trial court’s ruling, especially given that the engineer admitted that he did not understand the specifications for the rain tank system, yet he nonetheless “cut and pasted” those specifications into the design documents.

While this case was pending the appeal process, design professionals had expressed concern that the Court might accept the argument of the project owner, Heritage, that Virginia licensed design professionals breach the standard of care if they adopt into their sealed design documents the general plans and specifications for a product prepared by a non-engineer manufacturer. The Virginia Supreme Court neither accepted nor rejected that contention.

Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc.; No Limitations Protection Against Lawsuits By The Commonwealth

The second decision, issued in November 2016, arose from a project the general contractor, Hensel Phelps, had completed some 16 years earlier at Virginia Tech. Virginia Tech is a public, state owned university, and, as such, the University, like other agencies of the Commonwealth, is not subject to any statutory limitations period on claims by the Commonwealth.

The construction at issue in the case, a student health and fitness center, began in 1997 and was substantially complete in 1998, and all work was complete by June 2000. Years after completion, defects were discovered, and Virginia Tech repaired or replaced the defective work at a cost that Virginia Tech claimed to be in excess of $7.0 million. In April 2012, Virginia Tech claimed recovery of its repair and replacement costs against Hensel Phelps. Virginia Tech and Hensel Phelps eventually settled, with Hensel Phelps paying Virginia Tech some $3.0 million. Hensel Phelps then filed a lawsuit against its subcontractors who had performed the defective work, asserting breach of contract and indemnification.

The subcontractors defended on the basis that Hensel Phelps’ lawsuit was long outside Virginia’s five year statute of limitations on contract actions. The trial court agreed with the subcontractors and dismissed Hensel Phelps’ lawsuit.

On appeal to the Supreme Court, Hensel Phelps argued that the “flow-down” clause in its subcontracts flowed-down to the subcontractors the obligations that Hensel Phelps owed to Virginia Tech under the prime contract, including the obligation to respond to a Virginia Tech claim at any time. The particular subcontract clauses that Hensel Phelps relied upon were (1) the subcontractor’s incorporation by reference clause, found in most subcontracts, incorporating the prime contract into the subcontract, and (2) the subcontract language: “The subcontractor is bound to the contractor by the same terms and conditions by which contractor is bound to Virginia Tech.”

The Supreme Court rejected Hensel Phelps’ flow-down argument. The Court reasoned that, under Virginia law (like many other states), a waiver of rights must be shown by proving the party giving up its rights (here the subcontractor) has knowledge of the rights to be waived and intends to give up those rights. Hensel Phelps’ incorporation by reference subcontract clause and generally worded flow-down clause were not sufficient; there being no express statement by the subcontractor waiving its right to rely on the statute of limitations.

As a fall back argument, Hensel Phelps argued that it was entitled to indemnification by the subcontractors. The Court found Hensel Phelps’ express indemnification clause in its subcontracts, however, to be void under Virginia law. The clause included indemnification of Hensel Phelps for any act, error, omission or negligence of Hensel Phelps resulting in damages or losses to Hensel Phelps; thus calling for indemnification for Hensel Phelps’ own negligence, a fatal flaw under Virginia law. When Hensel Phelps turned to other subcontract clauses requiring the subcontractor to indemnify Hensel Phelps, the Court determined those clauses to be ineffective, particularly when it was clear that the parties had expressly otherwise agreed to an indemnification clause, although a clause void under Virginia law.

The take away for general contractors from this second decision is the wisdom of reviewing their “standard” subcontracts before using those “forms” on their next project. Are the terms drafted to obligate the subcontractor(s) to the same extent and for the same time that the general contractor obligated itself to the project owner, is the indemnification clause enforceable under the law applicable to the subcontract, and does the indemnification clause survive termination or close-out of the prime contract?

3. Conclusion

General contractors’ practices and procedures may have been sufficient in the past; but that should not dissuade them from periodically reviewing those practices and procedures and modifying them, if appropriate, to better protect their interests now and in the future.