Colorado Supreme Court Clarifies Bad Faith Standard

Ashley Harris | Property Insurance Coverage Law Blog | November 7, 2018

A recent Colorado Supreme Court opinion in Schultz v. GEICO Casualty Company, clarifies the standard for bad faith in Colorado. In the opinion, the court discusses both claims for common law bad faith and statutory unreasonable delay or denial of benefits.

Most notably, the court concluded that the insurance company’s conduct must be evaluated based on the evidence before it when it made its coverage decision, and that the insurance company may not create new evidence to try to support its earlier coverage decision.

This means that when defending against a bad faith claim by attempting to show it acted reasonably, the insurance company can only present the information it considered at the time it made the decision to delay or deny the claim.

The opinion also restates the standard for common law bad faith, which requires the insured to “establish that the insurer acted unreasonably and with knowledge of or reckless disregard for the fact that no reasonable basis existed for denying the claim.” Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).

With regard to a statutory claim, Section 10-3-1115, C.R.S. (2018) provides, in part:

(1)(a) A person engaged in the business of insurance shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of ay first-party claimant.

. . . .

(2)…for the purposes of an action brought pursuant to this section and section 10-3-1116, an insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.

The court confirmed what both the Colorado Court of Appeals and federal courts interpreting Colorado law have consistently recognized, which is that the proof of a statutory claim differs from the proof required in a common law bad faith claim:

[W]hereas a common law claim requires proof that the insurer acted unreasonably and that it knew or recklessly disregarded the fact that its conduct was unreasonable, ‘the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.’ (Citations omitted).

This opinion is great for Colorado policyholders, because it limits insurance companies to the information they had at the time they delayed or denied the claim, prohibiting them from hiring “litigation experts” to bolster an unreasonable delay or denial of the claim.

Insurance Appraisers May Determine the Cause of Loss

Mollie Pawlosky | Dickinson Law | November 1, 2018

In a case of first impression, Walnut Creek Townhome Association v. Depositors Insurance Company, the Iowa Supreme Court has held that insurance appraisers may determine the cause of loss in addition to the amount of damage.

Walnut Creek Townhome Association submitted a claim to Depositors Insurance Company for hail damage to the Association’s roofs.  Depositors felt that damage had been caused not by hail, but rather by defective shingles.  As part of the dispute, Walnut Creek exercised its right to an appraisal under the insurance policy.  Each party picked an appraiser, and an umpire was picked.  The three individuals then examined the roofs and prepared a report.

Two of the three on the panel opined that damage in the amount of approximately $1.4 million resulted from hail damage.  After a bench trial, the court found in favor of Depositors.  The trial court held that Walnut Creek had not proved that the storm was the only cause for damage.  The trial court also ruled that the appraisal award was not binding on the parties.

The Iowa Court of Appeals reversed, finding that the trial court was bound by the appraisal.  The Iowa Supreme Court granted further review, for the first time addressing whether parties are bound not only by appraisers’ decisions of valuation, but also by the appraisers’ causation decision.

The Court recognized the historical importance of insurance appraisal provisions, which can resolve insurance disputes without a formal lawsuit.  Since the 1940s, the Iowa Code has contained an approved appraisal provision for property insurance policies.  Iowa’s provision is similar to provisions adopted by 45 other states.  Courts are only allowed to set aside appraisal awards if the record demonstrates fraud, mistake, or misfeasance of the appraiser or umpire.  Depositors did not raise such arguments, so the appraisal award was binding.  The question was: Was the appraisal binding as to the amount of damage alone, or was the appraisal also binding as to what caused the damage?

Courts across the country are divided as to whether appraisers determine the cause-in-fact of damage.  The Iowa Supreme Court ultimately found that the “better-reasoned cases” hold that appraisers necessarily recognize causation when determining the amount of loss.  For example, if an appraiser is determining the amount of “storm damage,” the appraiser is not just assessing damage, but the appraiser is also stating that the damage is from a storm.

Without fraud, mistake or misfeasance, the district court was not free to make its own factual determination as to whether there was hail damage, even if the court disagreed.  The appraisers’ findings remained subject to coverage exclusions and limitations, which the trial court decides.  Thus, the Court remanded the case, with directions for the trial court to accept the appraisal award and then determine if any coverage defenses applied.

Florida Court Expands Statute of Repose for Improvements to Real Property

Madeline Hughes | Baker Donelson | November 1, 2018

The Fourth District Court of Appeals in Florida recently issued a decision in Gindel v. Centex Homes, that increases the amount of time homeowners have to file a lawsuit against homebuilders. The Court relied on basic principles of statutory interpretation to conclude that issuing pre-suit notice is an “action” under Florida’s statute of repose.

The statute of repose for improvements to real property provides a ten-year time period for homeowners to file an action against the homebuilder.1 In the Gindel case, homeowners moved into a townhome complex built by Centex Homes on March 31, 2004. Based on the statutory timeline, the homeowners had until March 31, 2014 to file an action against Centex Homes for any defects in the townhomes.

On February 6, 2014, before the ten-year deadline, the homeowners sent Centex a pre-suit notice of defect. The homeowners sent the notice to Centex in compliance with Florida’s mandatory pre-suit procedure statute. The statute requires a homeowner to notify the homebuilder of any construction defects before filing a lawsuit.2 The purpose of the statute is to give the homebuilder a chance to cure the defect as an alternative to litigation.

For the homeowners in this case, the additional procedural steps almost cost them their entire claim. Once Centex notified the homeowners that it would not cure the defects described in the pre-suit notice, the homeowners filed a lawsuit on May 2, 2014, a month past their ten-year deadline. Centex filed a motion to dismiss based on the statute of repose.

The issue before the court centered on whether the statute of repose was satisfied by the pre-suit notice given on February 6th. The court explained that because the statute of repose defines “action” as a civil action or proceeding, and because pre-suit notice is a proceeding, the pre-suit notice satisfies the statute of repose. The court reasoned that requiring homeowners to file a lawsuit to satisfy the statute of repose would render the term “proceeding” superfluous. The court explained that a better reading of the statute includes pre-suit notice as a proceeding that is part of an “action.”

The court held that the requisite pre-suit notice was sufficient to satisfy the statute of repose. Because the action commenced prior to the March 31, 2014 deadline, the homeowners were not barred from then filing suit.

The court’s interpretation of the statute of repose allows the homeowners to continue their suit against Centex to recover damages for construction defects made over 14 years ago. While this ruling likely will not open the flood gates of litigation, lawyers representing both homeowners and homebuilders should be aware that the statute of repose for improvements to real property does not require a formal lawsuit; rather pre-suit notice of a construction defect will protect plaintiffs from having their case dismissed.

1 Section 95.11(3)(c), Florida Statutes (2014).

2 Section 558.004, Florida Statutes (2014).

Timely Paying Appraisal Award Exempted Insurer from Breach of Contract and Bad Faith Claim

Marle Laur | Property Insurance Coverage Law Blog | November 3, 2018

In the case Biasatti v. GuideOne National Ins. Co., No. 07-17-00044-CV (Tex. Ct.App. Aug. 16, 2018), Steven Biasatti and Paul Gross, d/b/a TopDog Properties, brought suit against its insurance company, GuideOne National Insurance Company for breach of contract.

TopDog Properties (“TopDog”) was insured through a commercial insurance policy issued by GuideOne National Insurance Company (“GuideOne”). The property suffered a loss as a result of wind and hail damage, and TopDog put GuideOne on notice of the loss. The insurer inspected the property and determined that the damage totaled $1,896.88. GuideOne did not issue payment to the insured since the damage was less than the $5,000.00 deductible. When GuideOne did not change its coverage determination after a second inspection, TopDog requested appraisal of the claim. GuideOne responded that under the policy, only the insurer could invoke appraisal, and it declined to do so. The insured filed suit.

Months after TopDog filed suit, GuideOne invoked appraisal. The insured resisted, and the trial court refused to compel the appraisal. On appeal, the trial court was directed to grant GuideOne’s motion to compel appraisal.

The appraisers and umpire set the amount of loss at $168,808.00. GuideOne sent TopDog a check for $146,927.30, which reflected the amount awarded less the deductible and depreciation.

TopDog then filed a motion for partial summary judgment against the insurer for breach of contract and failure to timely pay the insured’s claim. The insurer argued, in its own motion for summary judgment, that since it had promptly paid the appraisal award, the insured’s claims against GuideOne could no longer stand. The trial court ruled in favor of GuideOne’s motion. TopDog appealed.

The appellate court affirmed the trial court’s ruling, holding that since GuideOne invoked the appraisal clause following the benefits dispute, as permitted by the policy, then timely tendered the appraisal award, TopDog received the benefits it was entitled to under the policy and did not demonstrate that any policy benefits were withheld.

Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.