Colorado Law Regarding Who Can Be An Appraiser is Still A Guess For Policyholders and the Insurance Industry – Colorado Is Looking For Guidance

Chip Merlin | Property Insurance Coverage Law Blog | November 23, 2019

The person that can qualify as an appraiser for a policyholder in Colorado is still a guess with policyholders not exactly knowing what to do about the selection of their appraiser. One Colorado insurance company law firm has their clients select very biased appraisers against their own customers and then challenges almost all policyholder appraisers as biased. This firm with their clients’ blessings, then tries to have the customer collect nothing arguing that the customer breached the policy by selecting a “biased” appraiser while having a “polecat” selected in the wings as their own appraiser.

What insurer acting in Good Faith would unleash lawyers against their own customers?

The Colorado Division of Insurance is asking for comments to a draft bulletin on this issue with the following notice:

Click on the image below to read the entire draft Bulletin and proposed language:

Merlin Law Group will certainly make a comment about the proposed draft language. I would suggest others reading this blog distribute the draft bulletin and let me know your thoughts in a legal sense. If you are a consumer advocate, I encourage you to file your own comments to the Colorado Division of Insurance.

Does the Implied Covenant of Good Faith and Fair Dealing Impose a Broad Duty on Insurers to Act “Reasonably” or “Properly” in Handling Claims?

Christina Phillips | Property Insurance Coverage Law Blog | October 30, 2019

The United States District Court for the District of Minnesota in Selective Insurance Company of South Carolina v. Sela,1 recently addressed whether the implied covenant of good faith includes a broader obligation to act “reasonably” and “properly” in making a decision about whether to pay benefits. Sela had submitted a claim for hail damage to his home. Selective investigated the claim and filed suit alleging that Sela made fraudulent misrepresentations and was not entitled to coverage. Sela counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith, pursuant to Minn. Stat. §604.18.

Under Minnesota law, the implied covenant imposes two obligations on insurance contracts. First, the implied covenant is breached when a party to a contract unjustifiably hinders the other party’s performance under the contract. Second, the implied covenant is breached when a party to a contract acts dishonestly, maliciously or otherwise in subjective bad faith in exercising unqualified discretion that is given to the party in the contract.

In granting Selective’s motion in limine to dismiss Sela’s claim for breach of the implied covenant of good faith, the trial court found the two obligations imposed by the implied covenant to be irrelevant in a case involving the denial of insurance benefits. The court concluded that common law does not impose a broad obligation of reasonableness on insurers. Rather, the only question in a denial-of-benefits case is whether the insurance contract requires the insurer to pay the claim. Such a determination is based on the language of the insurance contract.2

The trial court noted that Minnesota decided to address the issue of unreasonable claims handling through §604.148, and not by importing broad reasonableness obligations into insurance contracts via the implied covenant of good faith and fair dealings. It is within the bad faith claim that Sela will have to prove that Selective did not have a “reasonable basis” for denying his claim and that the person or persons at Selective who denied the claim “knew of the lack of a reasonable basis.” We will have to wait and see if Sela is permitted to recover damages and attorney fees pursuant to Minn. Stat. §604.18, as this part of the case is set for trial in December.
1 Selective Ins. Co. of South Carolina v. Sela, 2019 WL 3858701 (D. Minn. Aug. 16, 2019).
2 Id. at * 2.

When do Hard-Nosed Negotiations Become Coercion? Or, When Should you Feel Unlucky?

Stan Millan | Jones Walker | October 2, 2019

Conflict in a negotiation is to be expected and is arguably healthy for the process. Owners and contractors are constantly engaged in negotiations; whether it be negotiating changes to the work, changes to the schedule, or changes to the contractual terms.   But at what point does taking a strong position in a negotiation cross the line and become coercion or bad faith?

A recent decision from the Armed Services Board of Contract Appeals touched on this very issue.  While this is a government contract case, the issues discussed in this case (namely negotiating a change) are routinely encountered in just about every construction project. This decision is instructive because it adds to a trending line of cases that limit an owner’s and contractor’s negotiation tactics.

On August 5, 2019, the board issued an opinion in the appeal of Sand Point Services, LLC vs. NASA, ASBCA Nos. 6189.  In Sand Point Services, the contractor was hired by the owner to repair the Wallops Flight Facility’s aircraft parking apron. During its work, the contractor hit a differing site condition, namely unsuitable soils.  The contractor sought additional time and money for this differing site condition. The owner ultimately responded with a show cause letter to the contractor claiming, among other breaches, that the contractor was significantly behind schedule. This was generally viewed by all parties as the start of default proceedings against the contractor.

The contractor responded to the owner stating that it was behind schedule due to the owner’s impacts. The contractor principally argued that it was late due to the differing site soil conditions it encountered, which was the owner’s responsibility under the contract’s Differing Site Conditions Clause. Most construction contracts have similar risk shifting clauses placing unknown differing site soil conditions, for example, onto the owner and not the contractor. Such a differing site condition usually entitles the contractor to either additional time, money, or both.

In response to the contractor’s letter, the owner responded with a proposed change order. In that change order, the owner provided additional time, but no money. Importantly, the change order also required the contractor to execute a release and waiver with respect to this differing site condition claim. The contractor did not agree with the proposed change order and requested to be compensated for this impact, which it was entitled to receive under the contract if it had a legitimate basis for the additional costs.

The owner responded with a letter stating that if the contractor did not sign the proposed change order the contractor would “leave the Government no choice but to continue with termination for default proceedings.” The contractor believed the owner did not have grounds for default. Again, the main ground for default was the fact that the contractor was behind schedule. Yet, the owner tacitly, if not expressly, recognized the contractor was due additional time to its schedule as a result of the differing site soil conditions, a risk assumed by the owner. Faced with the possibility of a default termination—a death sentence to almost any construction contractor—the contractor signed the proposed change order.

The contractor later filed a suit against the owner seeking to essentially reopen the executed change order for the true cost of the differing site soils condition.  The owner moved for summary judgement (dismissal of the contractor’s lawsuit) based on the executed change order which only granted the contractor time, and no money.  The owner sought to also enforce the change order’s accompanying release and waiver signed by the contractor. The contractor argued it signed the contract modification under duress and because of the unfair negotiation that led to it executing the change order for only time, and no money.

In its decision, the board held that there were genuine issues of material fact as to whether or not the contractor signed the modification under duress.  Therefore, the board denied the owner’s motion for summary judgment.  In reaching its decision, the ASBCA cited to a line of cases holding that an owner cannot force a contractor to take an action (in this case sign a differing site condition modification for no money) under an improper threat of termination.  As the board noted, “the Government must have a good faith belief that it is entitled to take the threatened action.”  Sand Point Services, p. 8. While the board in this decision did not reach an ultimate conclusion on whether the owner’s actions rose to the level of duress or coercion, this case demonstrates that courts and boards do take such allegations seriously.

This recent decision in Sand Point Services adds to an already developed line of cases on this point. For example, courts and boards have previously determined that a wrongful threat of termination can constitute coercion. See Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (noting a threat of termination constitutes coercion if the threat is not justified or otherwise legally permissible); Beatty v. United States, 144 Ct. Cl. 203, 206 (1958) (“[I]t is only the threat of a wrongful or unlawful act that may constitute duress.”). Therefore, the key to determining whether a threat of termination constitutes coercion is contingent upon the legitimacy, or lack thereof, of the threat. Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21-22, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (“[T]he propriety of the Government’s threats to terminate for default hinges upon whether the delays arose from unforeseeable causes beyond the control and without the fault and negligence of appellant and its subcontractors and suppliers at any tier.”).

So, while negotiations can be contentious at times, owners and contractors must be aware of their limits. Owners cannot threaten a contractor with default if there is no legitimate basis to support it. Likewise, contractors cannot threaten to walk off the project without there being a legitimate basis (for example, an owner’s material breach of the contract). These types of threats are highly charged and must not be made lightly; they require significant and substantial support. Equally important, these threats must have a legitimate basis. If such threats are made without a legitimate basis, the owner or contractor may be prevented from relying on any “deal” made during that negotiation. But the owner or contractor may be exposed to far greater liability: claims of coercion and bad faith. Keep in mind that this general principle is equally applicable down the chain of privity and in relations between general contractors and subcontractors.

It is important to recognize your limits during negotiations. It is also important to know when your counterparty crosses the line so you can protect your rights.

The Murky Waters Between “Good Faith” and “Bad Faith”

Theresa A. Guertin | SDV Insights | August 1, 2019

In honor of Shark Week, that annual television-event where we eagerly flip on the Discovery Channel to get our fix of these magnificent (and terrifying!) creatures, I was inspired to write about the “predatory” practices we’ve encountered recently in our construction insurance practice. The more sophisticated the business and risk management department is, the more likely they have a sophisticated insurer writing their coverage. Although peaceful coexistence is possible, that doesn’t mean that insurers won’t use every advantage available to them – compared to even large corporate insureds, insurance companies are the apex predators of the insurance industry.

In order to safeguard policyholders’ interests, most states have developed a body of law (some statutory, some based on judicial decisions) requiring insurers to act in good faith when dealing with their insureds. This is typically embodied as a requirement that the insurer act “fairly and reasonably” in processing, investigating, and handling claims. If the insurer does not meet this standard, insureds may be entitled to damages above and beyond that which they could otherwise recover for breach of contract.

Proving that an insurer acted in “bad faith,” however, can be like swimming against the riptide. Most states hold that bad faith requires more than just a difference of opinion between insured and insurer over the available coverage – the policyholder must show that the insurer acted “wantonly” or “maliciously,” or, in less stringent jurisdictions, that the insurer was “unreasonable.”1

There are, of course, many different types of insurer behavior which exist in the murkier waters between “good faith” and “bad faith” of which policyholders should beware. The following list provides some examples of this questionable behavior.

  • Aggressive use of case law. When new case law is published, carriers race to the smell of blood and attempt to implement the law in new, overly aggressive ways. We saw this after the New York Court of Appeals issued its decision in the Burlington2 case in 2017. The true impact of the decision was fairly limited; the court found no coverage for an additional insured where it had been judged that the named insured was not at fault and the additional insured was solely at fault. That didn’t stop insurers from attempting to use Burlington to deny defense coverage to additional insureds. Policyholders should be sure they review insurer communications thoroughly and evaluate whether the insurer’s basis for disclaiming coverage is valid and appropriate.
  • Changes to insurer personnel. For policyholders who have been with the same insurer for years, there may be a sense of security that claims will be investigated, defended, handled, or settled a certain way. While it is certainly beneficial for corporate insureds to develop partnerships with their insurers, risk managers should always be on the lookout for change which could spell disaster. Sometimes a personnel change – especially when it comes to “legacy” claims like asbestos matters – could signal a shift in the insurer’s treatment of those claims.  Risk managers should insist on dedicated claims personnel whenever possible and hold regular stewardship meetings to maintain relationships and ensure that the insurer is aligned with their goals and strategy as much as possible.
  • Shifting Retroactive Dates. Claims-made policies, such as professional, directors & officers, and pollution insurance, often contain retroactive dates which limit how far back in time the insurer’s obligation to pay attaches. Sometimes, at renewal, the carrier may bump up that date to the start of the policy period – a change that may go by undetected, but can result in a major coverage gap. Retroactive dates should almost always be as far in the past as possible, coinciding with the start of the insured’s business if feasible or, at least, as far back as potential losses may have occurred which would give rise to current liabilities.
  • Refusal to disclose policies, claim numbers, and other non-privileged information. Upstream parties, such as owners and general contractors, have a right to see a copy of the policy on which they have been added as additional insureds. Insurers sometimes inappropriately refuse access to the policy, which hampers the additional insureds’ ability to pursue their rights. Similarly, other non-privileged information stored by the insurer should be accessible to the insured, including loss runs and other claims data. Redacting sensitive information (i.e., premiums) is acceptable, but complete withholding of policies on which you are insured is not.
  • Delay by document request. Another common tactic employed by insurance companies is delaying their coverage analysis until substantial documentation has been submitted to the insurer. Although this may be understandable in the first-party context (i.e., providing back-up documentation to support the cost of repairs for a builder’s risk claim) it is rarely valid when the insured is seeking defense from a liability insurer. Voluminous document requests for contracts, communications, job-site reports, and the like sometimes serve as a hidden means for insurers to delay providing defense, which should be determined based on the complaint’s allegations. 

Staying safe in shark-infested waters takes an educated and dedicated team of professionals. Risk managers should stay afloat by keeping up-to-date on current market and legal developments.

What Will a Denial of Costs Actually ‘Cost’ You?

Lori Bethea | Chartwell Law | September 6, 2019

Jennings v. Habana Health Care Center, 183 So. 3d 1131 (Fla. 1st DCA 2015), has been the law for almost five years, but many claims adjusters are still routinely denying entitlement to costs when responding to a petition. If you’ve been in this industry for a while and feel confident you have provided the requested benefits timely, you know it’s second nature to answer a petition indicating “costs and fees are not due or owing.” However, following the Jennings opinion, this blanket denial of entitlement to costs can have significant consequences, including exposure for attorney’s fees where fees would not have otherwise been due.

In Jennings, the First District Court of Appeal held that a claimant can be entitled to litigation costs even when the requested benefit has been timely provided. A quick recap of the facts in Jennings:

  • September 9, 2014 – claimant filed a PFB for authorization of the orthopedic evaluation;
  • September 11, 2014 – the carrier received the claimant’s PFB; and
  • September 12, 2014 – the carrier notified the claimant’s attorney of an appointment with an orthopedic physician (to occur on September 15, 2014).

The JCC found the claimant was not entitled to costs because the employer/carrier timely responded to the petition pursuant to §440.192(8) and §440.34(3)(d), F.S., and, therefore, she was not the prevailing party. Unfortunately, the First District Court of Appeal found that timeliness is irrelevant in addressing entitlement to costs, as the statute specifically distinguishes between entitlement to costs and entitlement to attorney’s fees. Pursuant to §440.34(3), F.S., “if any party should prevail in any proceedings before a judge of compensation claims or court, there shall be taxed against the non-prevailing party the reasonable costs of such proceedings, not to include attorney’s fees.” The court found that, pursuant to the statute, there is not a time limitation for determining entitlement to costs and, based on the record, the claimant was the prevailing party since her petition included certification that she made a good faith effort to resolve the dispute over benefits, prior to filing her petition, and the employer/carrier did not challenge that certification.

In light of this decision, it is crucial for adjusters to take an extra step, upon receipt of a petition, to confirm whether or not the claimant made a good faith effort before filing the petition so the adjuster can accurately respond on the issue of cost entitlement. If the claimant made a good faith effort, the carrier should concede entitlement to costs associated with the filing of the petition even if the benefit is provided timely. Otherwise, entitlement to costs remains an issue to be litigated, which has recently led some judges of compensation claims to award attorney’s fees for securing the “benefit” of proving entitlement to costs. In these cases, denying cost entitlement (where costs were due) resulted in carriers paying thousands of dollars in attorney’s fees for benefits they timely provided.