Be Careful with Good Faith Payments

Christopher G. Hill | Construction Law Musings | November 25, 2019

Sometimes doing the expedient thing and what looks good at the time can come back to bite you.  Just ask 3M Company.

In Faneuil, Inc. v. 3M Co., the Virginia Supreme Court considered a customer services subcontract between Faneuil and 3M relating to a toll collection contract 3M entered into with ERC.  The subcontract had a “pay if paid” clause in it requiring payment to 3M from ERC before ERC was required to pay Faneuil, a written change order provision and a base monthly payment to Faneuil for the services that could be reduced in the event of less than expected toll collections.  Further, the subcontract stated that if either party settled 3rd party claims, that settlement would not bind the other party to the subcontract absent consent or Court order.

Faneuil was then alleged to have been required to provide “Special Services” relating to manual identification of license plates and other information necessary for toll billing due to 3M’s alleged failure to provide adequate imaging services.  Faneuil requested (without written change order) and 3M promised to pay extra for these services.  When 3M was slow to pay for the special services, Faneuil did what you would expect and threatened to stop providing them.  Instead of contesting the right to the work, 3m made sporadic “good faith” payments to induce continued Special Services from Faneuil.  Eventually 3M’s issues caused ERC to stop payments and thus 3M stopped paying Faneuil.  3M then settled the payment claims with ERC and still failed to pay Faneuil.

Faneuil did what any subcontractor in this position would do and sued for 5 categories of damages, including for base payments.  After a bench trial, the Circuit Court dismissed all of the claims by all parties because Faneuil had not obtained a written change order for the Special Services (ignoring the other claims for damages) and that 3M had failed to follow the proper procedures for reducing the monthly payments.  The Virginia Supreme Court reversed.  It held that damages for the Special Services were off the table for a lack of written change order and that 3M’s counterclaims were in fact barred by the subcontract.

While those two holdings are interesting, the Court further went on to say that 1. the settlement between ERC and 3M satisfied the pay if paid requirement, and the reason for the title of this post, 2. 3M was not entitled to the benefit of its good faith payments to induce Faneuil to continue the special services.  The Court held that under Virginia law, these types of non-legally required voluntary payments are not recoverable.  The Court put the holding as follows:

[w]here a person with full knowledge ofthe facts voluntarily pays a demand unjustly made upon him … it will not be considered as paid by compulsion, and the party thus paying is not entitled to recover back the money paid, though he may have protested against the unfounded claim at the time ofpayment made. Where money has been paid under a mistake ofthe facts, or under circumstances of fraud or extortion, or as a necessary means to obtain the possession of goods wrongfully withheld from the party paying the money, an action may be maintained for the money wrongfully exacted. But such action is not maintainable in the naked case of a party making a payment ofa demand rather than resort to litigation. Williams v. Consolvo, 237 Va. 608, 613 (1989)

Thus, despite doing what was seemingly the expedient and correct business action at the time to keep the contracted work moving, 3M was required to pay the full base compensation without credits for its prior good faith payments.

Situations analogous to this occur on the construction site all the time.  Deals are struck to keep the flow of work moving.  Most of the time, these sorts of “on the fly” deals are helpful.  However, before taking such action, remember 3M and consult your local Virginia construction attorney before taking such steps.

“That Settles It”: The Georgia Supreme Court Provides Clarity Regarding an Insurer’s Duty to Settle

Michele N. Detherage | Robins Kaplan | November 15, 2019

New guidance from the Georgia Supreme Court re: an insurer’s duty to settle

The issue of whether an insurer has fulfilled its duty to settle in good faith was recently litigated in Georgia. Under Georgia law “[a]n insurance company may be liable for the excess judgment entered against its insured based on the insurer’s bad faith or negligent refusal to settle a personal claim within the policy limits.”However, until recently, it has been unclear exactly when an insurer’s duty to settle is triggered. In March 2019, the Supreme Court of Georgia issued a decision that provides some guidance. In First Acceptance Ins. Co. of Ga. v. Hughes,the Court examined: (a) whether an insurer has a duty to make an affirmative settlement offer absent an initial offer from an injured party, and (b) the effect of an injured party’s failure to include a time limit in their settlement offer.

The facts of Hughes are summarized as follows: On August 29, 2008, Ronald Jackson was involved in a multi-vehicle collision. At the time of the accident, Mr. Jackson was insured under an automobile policy issued by First Acceptance Insurance Company of Georgia, Inc., which included bodily injury liability limits of $25,000 per person and $50,000 per accident.Adjusters performed an investigation and concluded that Mr. Jackson was at fault in connection with the incident and that his exposure exceeded his policy limits. First Acceptance retained counsel to resolve the five related injury claims. In January 2009, First Acceptance’s attorney began to make settlement overtures to the claimants’ attorneys.4

On June 2, 2009, counsel for claimants Julie An and Jina Hong sent two letters to counsel for First Acceptance. In the first letter, the attorney stated that his clients were “interested in having their claims resolved within [the] insured’s policy limits, and in attending a settlement conference.”The letter, however, did not include a demand that First Acceptance respond by a date certain.The second letter requested that the company provide certain insurance information within 30 days and conditioned settlement upon compliance with that request.First Acceptance’s attorney reviewed the letters, but did not consider them to impose “any kind of time limit demand.”The letters were misfiled, and a response was not immediately provided.

Shortly thereafter, counsel for the claimants filed a lawsuit for damages arising out of the automobile accident. Then, on June 13, 2009, the claimants’ attorney sent a letter to counsel for First Acceptance revoking his clients’ settlement offer. Counsel for First Acceptance responded by inviting the claimants to attend a settlement conference – an offer which they declined, along with subsequent settlement offers, including an eventual tender by First Acceptance of the total policy limits.The matter went to trial in July 2012. The jury rendered a verdict in favor of the claimants, and the trial court entered a judgment against the now-deceased Mr. Jackson’s estate in excess of $5.3 million.10

In June 2014 the administrator of Mr. Jackson’s estate filed suit against First Acceptance, alleging that it acted negligently and in bad faith by refusing to settle the claim within the policy limits. First Acceptance made a motion for summary judgment, which the trial court granted. The Court of Appeals reversed the trial court’s decision, and First Acceptance petitioned for certiorari – which was granted by the Supreme Court of Georgia.11

As a preliminary matter, the Supreme Court addressed “whether an insurer’s duty to settle arises when it knows or reasonably should know settlement with an injured party within the insured’s policy limits is possible or only when the injured party presents a valid offer to settle within the insured’s policy limits.”12 The Court observed that other courts had found its prior decisions regarding this issue to be unclear.13 To put an end to any speculation, the Court definitively ruled that “an insurer’s duty to settle arises when the injured party presents a valid offer to settle within the insured’s policy limits.”14 15

Next, the Court examined the facts of the underlying action – namely, whether the claimants had made a valid offer that First Acceptance failed to accept either negligently or in bad faith.16 The administrator of Mr. Jackson’s estate argued that, read together, the two June 2nd letters established a 30-day deadline for First Acceptance to respond to the claimants’ settlement offer. The Court disagreed, observing that the June 2nd letters did not contain a time limit for acceptance of the claimants’ settlement offer – rather, the 30-day deadline applied to counsel’s request for insurance information. As such, First Acceptance “was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer.”17 In light of these facts, the Court opined that First Acceptance’s actions were reasonable, as an “ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”18 Accordingly, the Georgia Supreme Court reversed the Court of Appeals’ decision and held that First Acceptance was entitled to summary judgment with regard to the estate’s negligence and bad faith claims.19

In sum, the Court’s decision in Hughes indicates that, under Georgia law, (a) an insurer’s duty to settle is triggered when an injured party presents a valid offer to settle within policy limits; and (b) if an injured party’s settlement offer does not contain an express time limit for acceptance, an insurer’s failure to accept the offer within any specific period would not constitute a refusal of the offer. While it is too early for the impact of the decision to be fully apparent, Hughes provides valuable guidance for those attempting to engage in settlement negotiations that are compliant with Georgia law.

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.