Interest and Attorneys’ Fees? – Saved by the Federal Rules of Civil Procedure

J. Ryan Fowler | Property Insurance Coverage Law Blog | August 1, 2018

In a recent decision from a United States District Court, the trial court had to decide whether the insured was owed statutory interest and attorneys’ fees even though the insured did not properly plead for the interest or fees. In Agredano v. State Farm Lloyds, the insured prevailed on their breach of contract claim.1 After the trial, the court had to decide if the insured was allowed to recover statutory interest and attorneys’ fees.

The court discussed that attorneys’ fees are recoverable only if allowed by statute or contract. The insurance policy did not allow the recovery of attorney fees so the insured would only be entitled to attorneys’ fees if awarded by statute. The insureds argued that two statues allowed for the recovery of attorneys’ fees, the Civil Practice & Remedies Code and the Texas Insurance Code. The court examined the Texas Civil Practices and Remedies Code chapter and determined that it did not allow for the recovery.

The court next looked at the Texas Insurance Code and agreed with the insured’s case met the prerequisites of the statue to recover. However, the court held that the insured failed to plead claims under the statute or requested damages under the statue as a basis to recover. The court referenced that the order on defendants’ Motions for Summary Judgment stated that the only claim surviving the motion was the plaintiffs’ breach-of-contract claim.

The case ultimately had a happy ending for the insured as the court held that despite failing to request relief under the Texas Insurance Code in their pleadings, the insureds are entitled to attorneys’ fees and statutory interest under Federal Rule of Civil Procedure 54. The court looked at the text of Rule 54 in “[e]very [non-default] final judgment should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.”2

So, if the fees and interest provided for in the Texas Insurance Code are characterized as “relief” and if the insureds are entitled to that relief, then they may receive those fees and that interest despite not demanding them in their pleadings. The court looked at caselaw and determined that the Fifth Circuit observed that the Texas Supreme Court had frequently referred to the interest and fees imposed by the Insurance Code as a penalty that applies automatically if the claim is not paid within the period allowed.

Because the insureds satisfied all of the Insurance Code’s substantive requirements, they were entitled to that relief. Therefore, under Federal Rule 54(c), the final judgment for the insureds should grant that relief to them despite their failure to demand it in their pleadings.
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1 Agredano v. State Farm Lloyds, No. 15-CV-01067 (W.D. Tex.—San Antonio Div. July 25, 2018).
2 FED. R. CIV. P. 54(c).

Farmers Insurance Recognizes 25% Contractor Overhead and Profit!

Chip Merlin | Property Insurance Coverage Law Blog | May 22, 2018

Overhead and Profit can generate a lot of debate when insurance company adjusters are looking to meet their adjustment severity goals and lower claims payments. But have you ever wondered how those same insurers instruct their sales people to calculate overhead and profit when they are calculating the premiums that they charge their customers for the same coverage?

It would be reasonable to think that insurance companies would calculate the same overhead and profit, if not less, at the time of underwriting costs of construction. After all, insurance to value provides for new construction replacement costs, which are lower than repair construction values. But veteran readers of this blog know where this is going……

Analyze the above scan taken from a document instructing Farmers policyholders how to determine the cost to insure their homes. Can you divide ……by …… ? What does that equal? Bingo!! Twenty-Five Percent Overhead and Profit!!

Insurance company appraiser Jonathon Held, who promotes a much lower profit and overhead figure when he presents his knowledge of pricing to umpires, must be falling off his chair as he reads this. He is not alone. I expect that Farmers Insurance claims managers are wondering how many regulators will ask this question and how many bad faith lawsuits might arise from their customers’ reliance on this document. How will Farmers respond to customers who ask why its sales agents calculated twenty-five percent for overhead and profit when calculating their premiums when its adjusters calculate a substantially lower percentage when adjusting their claims. Farmers’ home office counsel are probably wondering if some smart class action attorneys may sue them for an extra five percent of all the claims payments that provided only twenty percent—at best—for overhead and profit.

The truth is that everybody in the insurance and restoration industry knows that general contractors generally need at least a thirty-eight to forty-two percent profit margin to break even. Restoration contractor associations teach this at their seminars. Even Belfor and ServoPro, dominant insurance industry stalwarts, estimate margins much higher than twenty percent when bidding jobs, even though their Xactimate estimates show something completely different.

Which begs the question…

Is Xactimate really exact? I can hear your laughter whether you want to admit it or not.

Apologize for a Design Error?

Melissa Dewey Brumback | Construction Law in North Carolina | April 19, 2018

Have you ever apologized to a client for a failure in your professional work? Is that a good idea, or one that will get you in trouble with your partners/ lawyers/ insurance carrier/ the Court? As always, the answer is “it depends”.

Clients are people too. Even institutional clients are made up of people, and all people appreciate being told the truth and having a sincere apology when warranted. However, in general, anything that is said against your own interests can be used against you in Court. What’s a responsible engineer or architect to do?

Last week, I attended a thoughtful presentation on apologies by Burns Logan, Corporate Counsel for Jacobs, at the American Bar Association’s Construction Law Forum.Burns Logan

Burns’ main take aways:

1. You don’t have to actually say you are “sorry” (especially if you aren’t) to get the benefit of the strategy. You only have to include an explanation, accept responsibility, and make a reasonable offer of repair.

2. Deliver the “apology” in mediation where you don’t run the risk of it being used against you as evidence in court (most apology statutes don’t help in construction-related disputes)

 

The second point is key– mediation in most states (including North Carolina) is confidential.  Nothing can be quoted or held against you if it is part of mediation.  So, consider taking responsibility (with explanation), but do so at your mediation conference.

If you’d like to see Burns’ entire slide show, it can be found here.  Thanks, Burns, for a very informative presentation.

Connected Devices Bring New Product Liability Challenges

Morrison & Foerster LLP | January 18, 2018

“My Google Home Mini was inadvertently spying on me 24/7 due to a hardware flaw,” wrote a tech blogger who purchased Google Inc.’s latest internet of things (IoT) device. Following the incident, a pact of consumer advocacy groups insisted the U.S. Consumer Product Safety Commission (CPSC) recall the Google smart speaker due to privacy concerns arising when the device recorded all audio without voice command prompts.

The CPSC is charged with protecting consumers from products that pose potential hazards. Traditionally, this has meant hazards that may cause physical injury or property damage. But as internet-connected household products continue to proliferate, issues like the “always-on” Google Home Mini raise an important question: Where does cybersecurity of consumer IoT devices fit within the current legal framework governing consumer products?

The Explosion of IoT

Forecasts predict that by 2020 IoT devices will account for 24 billion of the 34 billion devices connected to the internet. According to a recent Gemalto survey, “[a] hacker controlling IoT devices is the most common concern for consumers (65%), while six in ten (60%) worry about their data being stolen.”

The rapid growth of the IoT market and continued integration into daily life raises the question of which regulatory body or bodies, if any, should be responsible for consumer safety when it comes to cybersecurity for consumer IoT devices.

The Intersection of Consumer Product Safety, Privacy and Cybersecurity

The CPSC’s jurisdiction has traditionally been limited to physical injury and property damage. It is “charged with protecting the public from unreasonable risks of injury or death associated with the use of the thousands of types of consumer products under the agency’s jurisdiction.”

Companies reporting potential safety hazards are given the option to categorize the hazard as fire, mechanical, electrocution, chemical or “other.” But “other” has never been used to describe a hazard that did not involve a personal injury or property damage risk. CPSC enforcement actions against manufacturers of IoT devices for security defects that do not lead to physical injury or property damage would be unprecedented.

One way to think about CPSC’s potential jurisdiction is over incidents that could give rise to product liability claims. Product liability primarily aims to compensate consumers and bystanders for injuries caused by unsafe products and to incentivize manufacturers and supply-chain participants to take reasonable precautions in producing and distributing products. The underlying policy rationale is that manufacturers are typically in the best position to prevent harms caused by their products.

Product recalls seek to remove unsafe products from the market and prevent product liability claims from arising in the first place. But when does a privacy or security breach reach the threshold of a safety hazard or a product defect such that it mandates a recall? And what role do product recalls even play in an age where companies can deploy firmware updates to implement a corrective action for privacy or security breaches?

The very features that are potential weaknesses for IoT devices can also be leveraged as strengths. Google demonstrated this by issuing a security patch to address the “always-on” issue in its Google Home Mini.

Protecting Your Business in the Face of Regulatory Uncertainty

How do IoT companies manage regulatory compliance where the regulatory framework is so uncertain and regulators are unable to keep up with technological developments? One possible construct is to anticipate traditional product defect claims that consumers might bring against IoT products, and use the power of connected devices to safeguard against liability while also protecting the product brand.

Take, for example, manufacturing defects. Courts may find that errors or oversights in coding, random malfunctions or bugs in the system constitute product liability claims for manufacturing or design defects. But IoT companies can also look at ways to put checks in place to catch these issues early. And the ability of connected devices to provide effective—and even fun—warnings and instructions to consumers about possible flaws is limited only by developers’ creativity.

What about failure to warn? Product manufacturers have traditionally had a duty to warn of risks that they know about or reasonably should have known about. We recently wrote about the growing role of artificial intelligence and the implications of product manufacturers’ ability to mine big data. Companies that choose to collect and store that data do assume risks, but they also have the ability to assess problems and develop innovative ways to provide warnings about them.

It will take years for government regulators to catch up to these issues and enact applicable regulations, particularly in light of the current administration’s trend toward deregulation. This is a golden opportunity for IoT manufacturers to create their own framework for how best to protect consumers and to balance the risks and benefits of IoT devices.

Where Do New Risks Fit into the Old Framework?

Undoubtedly, the existing product liability framework has limits and doesn’t map perfectly to IoT devices. Consider the “always-on” feature recently brought to the CPSC’s attention. Under the economic loss doctrine, a plaintiff cannot recover monetary damages that don’t arise from physical injury to her person or physical harm to her property. Security breaches may cause an invasion of privacy without causing any physical injury, making the product liability framework inapplicable.

As shown by the recent consumer advocacy letter, these groups may argue that security considerations and subsequent risks of IoT devices—while different from traditional public safety concerns—still fall within the CPSC’s broad mandate to “protect the public against unreasonable risk of injuries and death associated with consumer products.” But without a clear CPSC directive that an injury to privacy falls within the requirements to report a safety hazard, IoT manufacturers would be voluntarily involving CPSC should they decide to report incidents similar to the Google Home Mini.

Although new regulations could fill the cybersecurity gap, technological innovation is far outpacing regulatory agencies. By the time applicable regulations are in place, they may already be out of date. Consequently, it is incumbent upon industry leaders to work together to pave the way for a robust cybersecurity framework that avoids stifling innovation by overregulation while still protecting consumers from security vulnerabilities.

Advances in IoT technology and its continued integration into everyday life are changing traditional notions of consumer product safety. Working closely with product liability, privacy and cybersecurity specialists will allow IoT companies to anticipate legal issues and use technology to stay ahead of regulatory enforcement and consumer-driven lawsuits.

Georgia Court of Appeals Holds that Sovereign Immunity Shields County from Contractor’s Claims Based Upon Unwritten Change Orders

Robert A. Gallagher | Constructlaw | December 28, 2017

Fulton County V. Soco Contracting Company, Inc., 2017 Ga. App. Lexis 568 (Ga. Ct. App., November 15, 2017)

Fulton County contracted with SOCO Construction Company (“SOCO”) to build a cultural center near the Fulton County Airport.  The contract specified that the contract sum and the contract time could only be changed according to County procedure, which required “a written, bilateral agreement (Modification) between the County … and the contractor.”

Adverse weather conditions, design delays, change order requests, and a federal government shutdown allegedly delayed the project.  Despite the County’s program manager listing more than 30 change orders in the project’s change order evaluation log, the County never issued any written change orders, including any change orders extending the contract time to account for the delays.  The County also withheld payment from SOCO.

SOCO sued the County for breach of contract and bad faith performance of contract, and it sought attorney fees and injunctive relief. 

The parties filed cross-motions for summary judgment on all claims.  The County based its motion on the grounds that sovereign immunity barred any claims arising from unwritten change orders.  The trial court denied the County’s motion for summary judgment.  The trial court ultimately granted SOCO summary judgment on all claims based, in part, upon Requests for Admissions to which the County had failed to timely respond, and awarded SOCO attorney fees.

The County appealed the trial court’s decision to the Court of Appeals of Georgia (Fourth Division).  The Court of Appeals reversed the trial court’s summary judgment rulings and vacated and remanded the trial court’s ruling on attorney fees.

The Court of Appeals held that the County did not waive its sovereign immunity for claims arising from unwritten contract modifications.  The Court noted that “the doctrine of sovereign immunity has constitutional status and may be waived only by an act of the [Georgia] General Assembly or by the constitution itself.”  The Court agreed with the County’s argument that although it had a written contract with SOCO, it did not waive its sovereign immunity defense for claims arising from unwritten contract modifications, which did not follow the County’s procedure.

The Court specifically disagreed with the trial court’s finding that the parties complied with the County’s protocol.  The trial court had found that an exception to the protocol applied because “extraordinary circumstances” existed, which caused the County administrators to order the changed work to avoid delay.  The Court of Appeals noted a lack of evidence to support that conclusion.

The Court also disagreed with SOCO’s argument that the County had waived its sovereign immunity based upon the fact that the County had requested changes to the work, the parties’ conduct, and certain facts which were deemed admitted.  While acknowledging the harsh result, the Court held that “parties are presumed to know the law, and are required ‘at their peril’ to ascertain the authority of a public officer with whom they are dealing.”  The appeals court refused to create an exception to the rules regarding waiver of sovereign immunity based upon any reliance SOCO may have placed upon the County’s actions or the facts deemed admitted.   As a result, the Court dismissed all of SOCO’s claims arising from unwritten contract modifications.