Arbitration Provision In Insurance Policy Applies Because Federal Arbitration Act Supersedes State Law Making Such Clauses Illegal

Chip Merlin | Property Insurance Coverage Law Blog | May 15, 2019

“Oh, Boy!” was my first thought after reading a case which holds that those arbitration agreements requiring policyholders to arbitrate in far-away places could not be stopped by state law. Congress should stop this, and state legislators should write laws to ban those insurance carriers who sell such policies.

Let’s all be honest and agree that these arbitration clauses are as anti-consumer as they come. The insurers and agents selling these products are no friends to policyholders. I warned about these clauses in, Surplus Lines Carriers Select Arbitration and Choice of Law in New York to Pay Less Coverage and Less on Claims.

The case1 involves a builders risk policy covering property in Louisiana that has an arbitration clause which states:

Any dispute, controversy or claim arising out of, relating to, or in connection with this Policy, shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the International Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration. The seat of the arbitration shall be New York, New York, in the United States of America.

The policyholder cited Louisiana law making such an arbitration clause illegal and unenforceable. The policyholder also pointed to the conformity to state law clause in the policy arguing that this clause meant that the policy should be interpreted to find that the Louisiana law making the arbitration clause illegal applied:

In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.

The court disagreed and held:

[T]he policy contains an arbitration provision. It is the arbitration provision of the insurance policy that is said not to conform with [the Louisiana statute,] a statute prohibiting arbitration agreements. This state statute, however, as we held in Safety National, is preempted by the Convention….Because the state statute,….is preempted by the Convention, the statute does not and cannot apply to McDonnel’s policy. And because the statute does not apply to the policy, there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.

Property insurance defense attorneys in New York, the most common place where the arbitration is to take place in these surplus lines policies, must be smiling because they will be getting a lot of legal business from far-away places. Surplus lines claims managers who are lowballing offers, delaying payments and denying claims are lighting cigars and fist pumping each other over this result. Surplus lines underwriters are getting flooded with messages to change the policy language and write policies with arbitration clauses in New York.

There is nothing good for policyholders in this decision. Surplus lines markets are growing, and this will give those carriers an ability to sell even cheaper insurance because most policyholders will generally find it too costly to fight for their benefits in an arbitration a long way from home.

Thought For The Day

Good intentions can often lead to unintended consequences. It is hard to imagine a law intended for the workforce known to Henry Ford can serve the needs of a workplace shaped by the innovations of Bill Gates.
—Tim Walberg
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1 McDonnel Group, L.L.C. v. Great Lakes Insurance SE, UK Branch, No. 18-30817, — F.3d —, 2019 WL 2082905 (5th Cir. May 13, 2019).

Do You Really Want Mandatory Arbitration in Your Construction Contract?

Christopher G. Hill | Construction Law Musings | May 14, 2019

If you are in construction, you have likley run across (or even drafted) a dispute resolution provision into your construction contract.  If you’ve been building for any length of time, you’ve read dispute resolution provisions containing mandatory arbitration clauses.  These clauses can be found in the AIA documents and in many of the contracts that I review for my clients in my role as construction lawyer and counselor.  More often than not, these arbitration clauses require arbitration (read “private court”) and refer to one of several sets of rules, though most likely the American Arbitration Association (“AAA”) Construction Industry rules.  In Virginia, as in most of the United States, these clauses are read liberally and enforced by courts except in limited cases such as waiver.

The main justification for requiring arbitration over litigation is to avoid the fees and expense of the litigation process.  In the right circumstances, arbitration does just that.  With a carefully drafted arbitration clauses and with the right case that requires expertise in construction that a judge does not have (they have to liten to all manner of disputes so are necessarily generalists), arbitration can and should be a streamlined and less expensive version of litigation.

However, in my time as a construction attorney, I have more often run into situations where the arbitration process is at least equally expensive and frankly not much more streamlined.  The additional administrative burden coupled with the possibility of paying for at least half of the hourly charges of one to three arbitrators is often not worth the additional expertise of those arbitrators.  Many construction claims simply come down to non-payment and whether the work was performed properly.  In my opinion, the fine judges in the Commonwealth of Virginia are more than capable of hearing this evidence and making a ruling.

Does that make arbitration the wrong choice in every instance? No.  I added “mandatory” to the title of this post for a reason.  Parties can always agree to arbitrate (or even better mediate)regardless of the contract. Even better, in our fine state where the contract is king, the dispute resolution provision can allow for a choice to be made between litigation and arbitration at the time of the claim.  This allows for flexibility and use of the appropriate tool for the job.

Where arbitration is the right way to go, that can and should be the choice, however where it is not the right way to go, mandatory arbitration clauses force the use of a process that may not be the best for either party to the contract.


Say What? Statutes of Repose/Limitation May Not Be Defenses in Arbitration?

David K. Taylor and Kyle M. Doiron | Bradley Arant Boult Cummings LLP | May 2, 2019

Most private construction contracts contain binding arbitration clauses and apply the “law of the state where the project is located.” While arbitration is less formal than court/litigation, legal defenses are often raised, including whether a claim is barred by a statute of limitation or, in the case of construction claims, a statute of repose. A statute of repose, as opposed to a statute of limitation, with a few exceptions, means that no matter when the claimed defect is “discovered,” the claim is barred if not brought within a specific period of time after substantial completion. For example, in Tennessee a claim must be brought within four years of substantial completion or that claim is barred by the statute or repose. However, a recent arbitration ruling raises concerns about whether such statutes will apply in arbitration.

Most statutes of repose (and limitation) apply to “any and all actions.” In a recent arbitration case, an owner brought a $1.5 million defective work claim against its prime contractor 10 years after substantial completion of a project that was located in Tennessee. The contractor moved to dismiss the claim based upon Tennessee’s four-year statute of repose. However, the owner cited a few reported court cases (none from Tennessee) and argued that the word “action” in the statute of repose was intended by the legislature to apply only to court cases, not to arbitration. One point made by the owner was that the statute of repose was passed decades prior to any state passage of arbitration laws allowing courts to enforce arbitration agreements. The contractor argued that if statutes of repose (and limitation) do not apply when the parties agree to binding arbitration, contractors (and subcontractors) would have unlimited liability for years–even decades–after substantial completion.

A few states have surprisingly adopted the owner’s argument. However, in most of those cases, the state legislatures jumped in to clarify the law (but not in time for the particular contractor who had lost the argument).

The Tennessee arbitration panel ruled that the four-year statute of repose did not apply in arbitration, even though it was undisputed that the arbitration was commenced 10 years after the project was completed. The panel commented that this problem was up to the Tennessee Legislature to fix. The contractor was then forced to defend the owner’s alleged defect claim. While the panel ultimately found in favor of the contractor, the legal and arbitration fees were extensive and would have been avoided if the arbitration panel had applied the statute of repose.

What can be done to avoid such a result? One way is not to agree to arbitration. However, there are many other reasons to choose arbitration, and it has become the preferred method of dispute resolution in most design and construction contracts. Another suggestion is to check each state’s statute of repose to determine if the applicable state statutes use the same word “action” and then review any published case law on the issue. A proactive approach might include lobbying state legislatures to amend their statutes to ensure that “arbitration” is included in the definition of “action.” Finally, a helpful contract drafting suggestion would be to include, in any contract that calls for binding arbitration, a provision that states that in any arbitration the parties agree that the arbitrator(s) must apply any applicable statutes of repose and limitation.

Say What? Statutes of Repose/Limitation May Not Be Defenses in Arbitration?

Kyle Doiron and David Taylor | Buildsmart | May 2, 2019

Most private construction contracts contain binding arbitration clauses and apply the “law of the state where the project is located.” While arbitration is less formal than court/litigation, legal defenses are often raised, including whether a claim is barred by a statute of limitation or, in the case of construction claims, a statute of repose. A statute of repose, as opposed to a statute of limitation, with a few exceptions, means that no matter when the claimed defect is “discovered,” the claim is barred if not brought within a specific period of time after substantial completion. For example, in Tennessee a claim must be brought within four years of substantial completion or that claim is barred by the statute or repose. However, a recent arbitration ruling raises concerns about whether such statutes will apply in arbitration.

Most statutes of repose (and limitation) apply to “any and all actions.” In a recent arbitration case, an owner brought a $1.5 million defective work claim against its prime contractor 10 years after substantial completion of a project that was located in Tennessee. The contractor moved to dismiss the claim based upon Tennessee’s four-year statute of repose. However, the owner cited a few reported court cases (none from Tennessee) and argued that the word “action” in the statute of repose was intended by the legislature to apply only to court cases, not to arbitration. One point made by the owner was that the statute of repose was passed decades prior to any state passage of arbitration laws allowing courts to enforce arbitration agreements. The contractor argued that if statutes of repose (and limitation) do not apply when the parties agree to binding arbitration, contractors (and subcontractors) would have unlimited liability for years–even decades–after substantial completion.

A few states have surprisingly adopted the owner’s argument. However, in most of those cases, the state legislatures jumped in to clarify the law (but not in time for the particular contractor who had lost the argument).

The Tennessee arbitration panel ruled that the four-year statute of repose did not apply in arbitration, even though it was undisputed that the arbitration was commenced 10 years after the project was completed. The panel commented that this problem was up to the Tennessee Legislature to fix. The contractor was then forced to defend the owner’s alleged defect claim. While the panel ultimately found in favor of the contractor, the legal and arbitration fees were extensive and would have been avoided if the arbitration panel had applied the statute of repose.

What can be done to avoid such a result? One way is not to agree to arbitration. However, there are many other reasons to choose arbitration, and it has become the preferred method of dispute resolution in most design and construction contracts. Another suggestion is to check each state’s statute of repose to determine if the applicable state statutes use the same word “action” and then review any published case law on the issue. A proactive approach might include lobbying state legislatures to amend their statutes to ensure that “arbitration” is included in the definition of “action.” Finally, a helpful contract drafting suggestion would be to include, in any contract that calls for binding arbitration, a provision that states that in any arbitration the parties agree that the arbitrator(s) must apply any applicable statutes of repose and limitation.n

Floating on Assumption: Navigating Construction Project Float Ownership

Whitney Judson | International Law Office | January 7, 2019

Introduction

Construction project schedules are oftentimes the source of many disputes between project owners and contractors. These disputes notoriously evolve into the subject of litigation and arbitration claims that assign fault for delayed project completion to one party or another. A party finding itself in such a scheduling dispute involving concurrent delays will need to demonstrate that the delays it caused did not affect the project completion date, while delays caused by the other party did impact the schedule. One way to prove this is to effectively evaluate the float on the project schedule and to make a careful evaluation of the circumstances surrounding each delay, including which party had the right to absorb any available project float. Oftentimes when delays occur and float is available, each party assumes it has a right to absorb the float. There are sensible reasons why one party may assume entitlement to float and subsequent exemption from liability for damages related to its delay. However, mere assumptions about float ownership—as reasonable as they may seem—could lead to unfavorable outcomes.

Project float is defined as “[t]he amount of postponement which a path of activities can experience without delaying the overall project completion.” Titan Pacific Const. Corp. v. U.S., 17 Cl .Ct. 630, 636 (1989). See also MW Builders, Inc. v. United States, 134 Fed. Cl. 469, 478 n.5 (2017) (“The term ‘float’ refers to the amount of time an activity may be delayed before affecting the critical path of the project”). Ownership of float is critical to a concurrent delay analysis and has a strong impact on whether a contractor has a legal right to delay damages or time extension of a project.

Contractor-owned float

Contractors sometimes assume that they should own and control any float on a project schedule. Many construction contracts require the contractor to control means and methods in the most efficient manner, including effectively sequencing work on the project. Having the ability to control project sequencing and coordination assists the contractor in creating the schedule and estimating the completion and float times for all activities. When delays later interrupt the schedule, the contractor may be responsible for using means and methods to efficiently make adjustments so that the project may nonetheless finish on time when possible. The contractor could arguably also use any available project float for schedule recovery.

For this reason, some construction contracts may include clauses granting the contractor float ownership. Such clauses could mean that owner-requested changes to activities that are not on the critical path require the owner to grant an extension to the contract completion date, despite the availability of unused float. If the contractor is contractually granted ownership of float, the contractor may argue that it has the right to use the float however it wishes—including reserving the float as a safety net for any contractor-caused delays, or conserving the float in an effort to complete the project ahead of schedule.

It is not completely safe to assume however, that a contract clause granting the contractor ownership of project float will fully safeguard the contractor from being affected by owner-caused delays. A contractor’s responsibility to control the means and methods of the project likely involves the contractor’s good faith effort to mitigate delays. If the owner causes a delay, the contractor owning float nonetheless may have a duty to adjust the work and schedule to mitigate the effects of that delay. The owner may likely be responsible for any costs related to the adjustment of the work and the mitigation of the delay without use of available float, but the contractor is still affected by an owner’s delay because it may have to work to implement the same scheduling and sequencing adjustments required when the owner simply utilizes available float.

Owner-owned float

Owners sometimes assume that they should own all available project float. After all, the owner is financing the project and owns and takes responsibility for its construction and completion. If a contract specifies that the owner of a project controls the float, the owner may argue that it has the right to direct the contractor to make non-critical changes without being required to grant the contractor an extension of the completion date. The owner may also argue that in certain circumstances, it has the right to use the float to excuse itself for its own delays. If the length of the owner-caused delay does not overrun the project float, it likely will not affect the critical path. In this situation, the owner may not be required to extend the project completion date, despite being responsible for project delays.

A contract clause granting float ownership to a project owner, however, may not shield the owner from the obligation to compensate the contractor for any damages that the owner’s non-critical delays cause. For example, an owner who uses float to make a change to a non-critical activity that requires additional manpower or materials may not be required to extend the contract completion date, but likely will be required to compensate the contractor for any costs associated with implementing the owner’s requested change.

Project-owned float

If the contract does not specify which party owns the float, the float is typically assumed to be owned by the project itself. This means neither the owner nor the contractor has exclusive control over the float. The float is instead consumed by whichever party needs it on a “first come, first served” basis. Here are two examples with different outcomes that illustrate the implications of shared float: A contractor builds a schedule indicating that glass window installation on a project carries 32 days of float before it begins to affect the critical path. The owner, at some point, decides to implement circular windows on the project, rather than keeping the original square-shaped design contemplated in the project schedule. This increases the amount of time needed to install the glass windows on the project. The contractor determines that cutting circular windows takes 29 days longer than cutting squared windows. The owner’s change therefore causes a delay and consumes all but 3 of the 32 days of float available for window installation. This delay is clearly the fault of the owner, but does not require the owner to grant a contract extension because the delay does not affect the critical path of the project, as the owner had a right to use available project float to offset its delay.

Conversely, if the contractor experienced 5-day delay in the staining of the glass for the windows prior tothe owner requesting a change in the shape of the windows, the contractor has the right to use 5 of the 32 days of float, leaving 27 days of float remaining. The owner’s subsequent 29-day circular window change would then overrun the available float and affect the critical path, requiring the completion date to be extended by 2 days. In each example, the first party to use the float is granted priority of ownership. If the other party is responsible for a subsequent, additional delay to the same activity on the schedule, it is only allotted whatever amount of float is remaining. Delays running beyond the remaining float may require a contract extension or delay damages.

Comment

Successfully staking claim on project float may excuse a party’s delay in a concurrent delay dispute. This should not be done by reliance on assumptions of float ownership. Rather, the parties should engage experienced counsel to negotiate a contract clause that clearly and unambiguously assigns ownership of project float. Such clauses may not offer unbridled use of non-critical delays to the float-owning party, but they allow the parties greater control over the possibilities of legal outcomes and provide a clear understanding between the parties of how float is to be utilized. If the parties do not specify float ownership, shared float is assumed and the parties then lose the ability to specify how the float is allocated. When the parties share project float, they must take care to expeditiously exercise their right to it, as float is consumed on a first come, first served basis. Simply assuming that the amount of float indicated on a project schedule will be available at any given time could have grave consequences. Speaking with legal counsel experienced in construction law matters, including scheduling and delay issues, is helpful to any party who wishes to proactively address float ownership issues and avoid or limit future liability for delays on a construction project.