Release Language Extended to Successor Entity but only Covered “Known” Claims

David Adelstein | Florida Construction Legal Updates | July 5, 2019

A recent case contains valuable analysis that has impact on whether a “successor” entity will be bound by a settlement agreement it was not a direct party to. This case contains arguments for contractors that can be raised in a number of different contexts if it is sued by a successor or related entity.

The same case discusses the difference between releasing a party for “known” claims without releasing the same party for “unknown” claims. This is an important distinction because unknown claims refer to latent defects so a release that only releases a party for known claims is not releasing that party for latent defects.

In MBlock Investors, LLC v. Bovis Lend Lease, Inc., 44 Fla. L. Weekly D1432d (Fla. 3d DCA 2019), an owner hired a contractor to construct a project. At completion, the owner transferred the project to an affiliated entity (collectively, the “Owner”). The contractor sued the Owner for unpaid work, the Owner claimed construction defects with the work, and a settlement was entered into that released the contractor for KNOWN claims. Thereafter, the Owner defaulted on the construction loan and agreed to convey the property through a deed in lieu of foreclosure to an entity created by the lender (the “Lender Entity”).

The Lender Entity sued the contractor for construction defects – in negligence (negligent construction) and a violation of Florida’s building code. The contractor argued that such claims should be barred by its settlement agreement with the Owner. There were two driving issues:

First, did the settlement agreement with the Owner extend to the Lender Entity because the Lender Entity was a successor entity to the Owner?

Second, even if the Lender Entity was a successor entity to the Owner, were the construction defects latent defects because the settlement agreement only provided a release of KNOWN (or patent) defects?

As to the first issue, the appellate court held that the Lender Entity was a successor entity to the Owner.

[I]t is rather clear that [Lender Entity] is in fact, [Owner’s] ‘successor’ for purposes of the settlement agreement with [contractor] because [Lender Entity] took over the Property and all of [Owner’s] rights with regard to the Property. Thus, [Lender Entity] clearly met the privity requirement for the application of res judicata in this case: it has a mutual or successive relationship to the same right that [Owner] had when it settled with [contractor]: a reduction in the amount owed to [contractor] for its services in exchange for releasing [contractor] from any claims of construction defects as provided for in the [settlement agreement].

As to the second issue, and really the driving issue whether or not the Lender Entity was a successor, was whether the release even protected the contractor from the types of construction defect claims sought. This is a question of fact because the settlement agreement only included a release of “known” claims and did NOT release the contractor for “unknown” claims, i.e., latent defects. Hence, the Lender Entity will establish such claims were unknown or could not reasonably have been discovered at the time of the settlement (a latent defect). The contractor will try to argue otherwise creating an issue of fact as to whether the settlement agreement released the contractor for the construction defects the Lender Entity is asserting.

When Can My Property Insurance Claim Be Denied Due to War or Other Undefined Terms?

Derek Chalken | Property Insurance Coverage Law Blog | July 23, 2019

I often receive calls from policyholders asking how an insurance company can deny their claim based on an exclusion that isn’t defined in the policy. One of these terms is “surface water,” a common exclusion found in most policies. Recently, I had a client whose home’s gutter system malfunctioned during a rainstorm. Rather than channeling water to run from his roof, through the gutter system and out to the street, water was redirected at the side of the home. The water filled up a planter built in to the side of the house and eventually made its way into the home, damaging his flooring.

His insurer denied the claim based on the “surface water” exclusion, claiming the water became “surface water” when it pooled in the planter. In that case, I used one of my favorite resources, Couch on Insurance, to define “surface water” and to explain to the carrier that they were wrongly defining the term. We were forced to file a lawsuit and the trial court agreed the term was ambiguous, and better yet, agreed with our definition of the term, ruling that surface water is water diffused over the surface of land, following no defined course or channel, and which naturally drains. In that case, as the water did not follow a defined course—that is through the gutter and into the planter—it was not surface water. The carrier’s “everyday” definition of surface water (“water on the surface of the ground”) was unpersuasive in the insurance context.

Recently, an appellate court in California was faced with making a similar decision in determining whether undefined policy exclusions for “war” should exclude coverage in a commercial claim. In California, an insurance policy is a contract subject to ordinary contract interpretation rules holding that the “mutual intention” of the parties.1 When it comes to undefined terms, like ‘war” or “warlike actions by a military”, the terms are to be interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage, in which case the latter must be followed.2 3 Even then, the policy exclusions need to be strictly construed against the insurer and exceptions to those exclusions are broadly construed in favor of the insured, under the doctrine of Contra Proferentem.4

Last week, the United States Court of Appeals for the Ninth Circuit issued its opinion in Universal Cable Productions, LLC, et al. v. Atlantic Specialty Insurance Company, Case No. 17-56672 (Central District of California Case No. 2:16 cv-04435 PA). The appellate panel reversed portions of the lower court’s summary judgment ruling in favor of Atlantic Specialty Insurance Company (“Atlantic”), in the lawsuit brought by its insured Universal Cable Productions (“Universal”).5

As part of its insurance claim, Universal claimed damages for expenses it incurred when it moved production of the television series Dig (starring Anne Heche) from Israel amid the conflict between Israel and Hamas in June 2014, just after the show’s pilot was filmed in Jerusalem. At that time, the United States State Department issued warnings about worsening conditions in and around Israel due to the conflict. Universal claimed it incurred costs for a breach of contract and bad faith in the amount of at least $6.9 million when Atlantic denied their claim.

The policy held by Universal covered losses caused by terrorism, unless the loss was not otherwise excluded, and in this case, the relevant provisions were exclusion by:

  1. War, including undeclared or civil war, or,
  2. Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents;…

These terms were drafted by Universal, which is part of the reason why Contra Proferentem (holding that terms be construed against the party drafting them) did not apply to this case.6

Prior to the June 2014 incidents, Universal’s insurance broker and Atlantic discussed potential issues that may arise on the production of the show Dig as a result of filming in Israel. After these discussions, Atlantic confirmed it would not be changing the policy’s terms or adding exclusions, or even charge any additional premium. Even though the parties had these discussions, Atlantic rejected the claim on the two exclusions for losses related to “war” and “warlike actions by a military force.” Originally, the lower court held that the war exclusions should be understood in their ordinary and plain sense, instead of applying the special meaning of the terms in the insurance context of which Atlantic had notice. However, the Ninth Circuit reversed these rulings holding that both of the war exclusions describe only conflicts between two or more sovereign or “quasi-sovereign” movements. However, the court reasoned that Hamas was neither a sovereign or quasi-sovereign movement, and thus the exclusion should not have applied.7 8

In making its ruling, the appellate court noted that Universal presented compelling information from another leading insurance reference, Appleman on Insurance, which defines “war” as a course of hostility between states or state-like entities.9

Like with “surface water,” the court went through the process of defining “war” by using the most applicable treatises and case law in reaching its conclusion.

Should your claim be denied due to a policy term you believe to be ambiguous or undefined, contact a Merlin Law attorney for a consultation.
1 Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.
2 Id.; California Civil Code § 1644.
3 First, a policy provision needs to be found to be ambiguous – that is, when the provision is capable of two or more constructions, both of which are reasonable. Bay Cities Paving Grading, Inc. v. Lawyers’ Mutual Insurance Co. (1993) 5 Cal. 4th 854, 867.
4 E.M.M.I Inc. v. Zurich Am. Ins. Co. (2004) 32 Cal.4th 465, 471.
5 Following Nat’l Am. Ins. Co. of Cal. v. Certain Underwriters at Lloyd’s London (1996) 93 F.3d 529, 537.
6 Even though the provisions were proposed by Universal, they were common form language used in many insurance policies.
7 A third exclusion based on losses due to “insurrection, rebellion or revolution” was also relied upon by Atlantic but was not at issue in the appeal. The district court will need to rule on this exclusion on remand.
8 The Ninth Circuit based its finding on facts that United States has never recognized Palestine or Gaza as sovereign territorial nations nor Hamas as a sovereign or quasi-sovereign (i.e., a de jureor de facto government – a government having significant attributes of sovereignty).
9 Universal Cable Productions, LLC, et al. v. Atlantic Specialty Insurance Company, Case No. 17-56672 (Central District of California Case No. 2:16 cv-04435 PA), page 21.

Court Denies Recovery of Public Adjuster Fees in Breach of Contract Action

Ashley Harris | Property Insurance Coverage Law Blog | December 16, 2018

In Kingshill Hospitality, Inc. v. American Economy Insurance Company,1 the policyholder’s hotel was damaged by a fire. Three days later the policyholder hired a public adjuster to assist in submitting its insurance claim. A dispute arose regarding the amount of loss and the policyholder filed suit for breach of contract.

As part of the damages claimed, the policyholder sought recovery of the public adjuster fee as consequential damages. The insurance carrier moved the court to strike the claim for consequential damages, which the court granted.

The policyholder argued that “it had to retain the services of an insurance claims professional (Public Adjuster) to pursue its claim.” The court disagreed, reasoning that consequential damages are “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act,” and here, the policyholder hired the public adjuster only three days after the fire occurred and before the insurance carrier made a coverage determination. The court concluded:

Because these costs were incurred in May – before the alleged breach occurred when American Economy partially denied coverage on June 1 – Kingshill’s public adjuster expenses cannot be categorized as consequential damages.

While not relevant under the facts of this case, the court noted:

If an insured believes that its insurer is not attempting to settle a claim in good faith and hires a public adjuster to refute the damage estimate or coverage determination proferred by an insurer, such expenses could be considered consequential damages. And under those facts, the consequential damages would be extracontractual damages that could only be recovered in a bad faith action, pursuant to QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541 (Fla. 2012).

It should be noted that courts in Florida have found that consequential damages can be recovered in a breach of contract action.2 Here, however, where the public adjuster was hired before a dispute arose regarding the loss or coverage, the public adjuster fees were not recoverable.
1 Kingshill Hospitality, Inc. v. American Economy Ins. Co., No: 5:18-cv-520, 2018 WL 6427681 (M.D. Fla. Dec. 5, 2018).
2 See e.g.Trident Hospitality Florida, Inc. v. American Economy Ins. Co., No.: 6:08-cv-289, 2008 WL 11334515 *2 (M.D. Fla. May 30, 2008) (“Plaintiff is entitled to consequential damages if it can prove that damages ‘were within contemplation of the parties when the contract was formed.’” Citing Martin v. Monarch Life Ins. Co., No. 94-1182, 1995 WL 127157, at *1 (M.D. Fla. Mar. 21, 1995)).

Federal District Court Weighs in on Whether Labor Can Be Depreciated in Arriving at an Actual Cash Value Loss Settlement

Edward Eshoo | Property Insurance Coverage Law Blog | December 7, 2018

Whether labor can be depreciated in arriving at an actual cash value property loss settlement has been a hot topic of debate over these past five years. A federal district court in Ohio recently weighed in on the issue in ruling on motions to dismiss two putative class action lawsuits, one against State Farm Fire & Casualty Company1 and one against Allstate Indemnity Company.2

The insureds in both cases challenged whether labor could be depreciated in arriving at an actual cash value settlement. In concluding that it was proper to do so, resulting in the dismissal of the lawsuits, the district court reasoned that the term “actual cash value,” which was undefined in the State Farm and Allstate policies, meant replacement cost less depreciation and that the plain and ordinary meaning of the term “depreciation” was inclusive of labor. The district court also found persuasive those decisions from other courts that had likewise found that labor should be included in depreciation.3

The results reached in Perry and Cranfield are contrary to the results reached in Hicks v. State Farm Fire & Casualty Company,4 and Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London,5 two recent decisions in which the Sixth Circuit Court of Appeals and a federal district court sitting in Mississippi concluded that labor costs should not be depreciated in arriving at an actual cash value settlement using a replacement cost less depreciation formula. Unlike the district court in Perry and Cranfield, the courts in Hicks and Titan Exteriors found no reason to decide which of the competing legal decisions were correct. Instead, they concluded that all of the interpretations offered by courts considering the labor depreciation issue were reasonable, rendering the term actual cash value ambiguous when defined as replacement cost less depreciation.

While the labor depreciation issue is an interesting legal debate, insurers can put this debate to rest simply by drafting its policy like State Farm has done in its “Actual Cash Value Endorsement” to clearly and unambiguously state that labor is subject to depreciation.6 Until they draft their policies to reflect their intent for labor to be subject to depreciation, insurers will be left to deal with decisions like Hicks and Titan Exteriors.
1 Cranfield v. State Farm Fire & Cas. Co., No. 1:16-cv-1273, 2018 WL 6162900 (N.D. Ohio Nov. 26, 2018).
2 Perry v. Allstate Indem. Co., No. 1:16-cv-01522, 2018 WL 6169311 (N.D. Ohio Nov. 26, 2018).
3 The district court referred to these cases as the current majority view among state and federal courts. But, as the Hicks court observed, these cases are not similarly situated. Many of them were not decided using the replacement cost less depreciation formula; instead, they employed the broad evidence rule, or some form of fair market valuation. Seee.g.Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780 (Minn., 2016) . Under both the market value test or the broad evidence rule, all relevant evidence is considered in in calculating actual cash value.
4 Hicks v. State Farm Fire & Cas. Co., No. 18-5104, 2018 WL 4961391 (6th Cir. Oct. 15, 2018).
5 Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London, 297 F. Supp. 3d 628 (N.D. Miss. 2018).
6 Under this endorsement, all components of the estimated actual cash value, defined as the estimated cost to repair or to replace damaged property, are subject to depreciation, including labor, materials, taxes, and overhead and profit.

California Court Finds Coverage When “Property Damage” Doesn’t Require Physical Injury By Definition

Tamara Boeck | Ahead of Schedule | November 7, 2018

Although it may seem strange at first, the recent ruling by the California Fourth Appellate District Court in Thee Sombrero, Inc. v. Scottsdale Co., (2018 EL 5292072), holding that an insurer must pay for a claim where there was no actual physical property damage, is not as odd as it may seem to non-insurance coverage lawyers.  The reason?  It all depends on the policy language and the definition of “Property Damage” where there is an “occurrence.”

The underlying facts are noteworthy in that there was no dispute that the plaintiff-claimant, Thee Sombrero, Inc. (Sombrero), lost revenue and the value of its real estate (diminished value) when the security company it hired to provide security guards failed to keep guns out of Sombrero’s nightclub.  A fatal shooting due to that alleged negligence (“an occurrence”) resulted in a lost ability by Sombrero to operate its property as a nightclub.  That specific loss of use totaled almost a million dollars in diminished value of the Sombrero property.  Sombrero sued the security company for the lost value, and the security company defaulted.  Sombrero then pursued the security company’s insurer, Scottsdale, under California Insurance Code section 11580, which allows a prevailing claimant to file a direct action against the insurer for coverage under the applicable insurance policy.

Scottsdale filed a motion for summary judgment not long after the section 11580 action was filed against it, arguing that the loss of the “use permit” for a nightclub was not lost use of tangible property, but merely the loss of an intangible right to use property in a certain way, and really economic loss that is not covered as property damage under the policy. The trial court agreed.  Sombrero appealed and argued in essence that “[t]he loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’” To which the appellate court commented, “It defies common sense to argue otherwise.”  At the same time, however, the appellate court identified contrary authority involving Scottsdale (albeit in Washington State) that was “strikingly similar” to the present case, yet distinguished the prior Scottsdale decision on three grounds:  1) the focus should be on the loss of use of the tangible property that results from the loss of the entitlement, not just the entitlement, 2) the loss is not defined in the policy as requiring a “total loss” and therefore under normal interpretation standards “any significant use” lost would be within the reasonable expectation of the insured for coverage, and 3) acknowledging that a leasehold of a specific type of property is an actual property right, and the loss of such use of a property right is therefore a loss of use of tangible property.   In stating the “correct principal,” the appellate court held that “losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”  Here, because the Scottsdale policy “expressly defined property damage as including” ‘[l]oss of use of tangible property that is not physically injured,” the appellate court disregarded the distinguishable California cases with differing policy language under consideration.

While this case did not arise out of a construction defect dispute, the points of insurance coverage may be applicable in a future construction defect context where there has been an “occurrence” but no physical injury to the property, only a valuable loss of use of that property.  Of course, it will always depend on the specific language of the insurance policy, which is why it is so important to understand the insurance policies and potential for coverage in any dispute.