Suit Limitation Provision Upheld

Tred R. Eyerly | Insurance Law Hawaii | February 25, 2019

    The policy’s one year suit limitation provision was upheld, depriving insureds of benefits under the policy. Oswald v. South Central Mut. Ins. Co., 2018 Minn. App. Unpub. LEXIS 1077 (Dec. 24, 2018). 

    The Oswalds’ hog barn burned down on June 21, 2016. Arson was a possible cause. 

    The Oswalds were insured under a combination policy issued by North Star Mutual Insurance Company and South Central Mutual Insurance Company. Central provided coverage for basic perils, broad perils, and limited perils, which included fire losses. The Central policy required property claims to be brought within one year after the loss. By endorsement, the North Star policy required suits be brought within two years after the loss. Presumably, the claims was denied, although the decision does not state this.

    During the investigation of the cause of the fire, the Oswalds attempted to serve a complaint on Central on June 1, 2017, alleging breach of contract, unjust enrichment, and breach of good faith and fair dealing. The Oswalds failed to properly serve Central and moved to dismiss their complaint without prejudice. The dismissal was granted. The Oswalds then filed an almost identical complaint on September 25, 2017, and properly served the complaint. Central file a motion to dismiss because the suit was filed past the one-year limitation contained in the policy. The motion was granted. 

    On appeal, the court found the one-year limitation was not inherently unreasonable. While investigating the cause of the fire, the Oswalds still managed to file a complaint before the one-year deadline. Had the Oswalds properly served Central, they would have commenced a suit regarding their current claims within the one-year limitations period. Nor was there any statute prohibiting the one-year limitation period. 

    The Oswalds also argued that the policy was ambiguous. The policy continuously referred to the two insurance companies as “we” or “us” instead of including a clear delineation between the two companies. But the policy also clarified that all its terms “applied to both companies listed on the declarations unless otherwise designated.” 

    The Oswalds contended that the policy did not provide a clear and unambiguous limitations period. However, the one-year limitation was clearly stated within the policy conditions. 

    Finally, the one-year limitation was not tolled due to either fraudulent concealment or equitable principles. The Oswalds failed to identify an affirmative statement which concealed a fact, defeating their argument for tolling the one-year limitation due to fraudulent concealment. Equitable tolling was inappropriate when there were no circumstances beyond the plaintiffs’ control that prevented service of a complaint within the limitations period. Here, the Oswalds attempted to commence a suite within the one-year limit, but failed for reasons within their control. Thus, equitable tolling was inappropriate. 

    Consequently, the lower court’s dismissal was affirmed. 

“Just What Was Needed”: Another Way to Waive a Right to Arbitrate

Gilbert A. Samberg | Mintz | February 25, 2019

Want to give up a contractual right to arbitrate? Easy. Don’t seek to enforce it. For example, just litigate for awhile and don’t mention your arbitration clause. The court has no obligation sua sponte to raise or enforce your contractual right if you choose not to. Or do nothing at all. At least two New York State trial courts tell us that your unexcused default in responding to a summons and complaint can be deemed a waiver of a contractual right to arbitrate. SeeCrowdpay US Inc. v. Midnight Gaming Corp. (a/k/a McGraw Inc.), 2019 N.Y. Misc. LEXIS 389 (Sup. Ct. N.Y. Co. Jan. 23, 2019); Charming Shoppes, Inc. v. Oberling Constr. Inc., 186 Misc.2d 293, 297, 717 N.Y.S.2d 860, 2000 N.Y. Misc. LEXIS 471 (Sup. Ct. Monroe Co. 2000). Those courts granted default judgments on contract claims in such circumstances notwithstanding that the contracts in question contained arbitration clauses.[1]

An agreement to arbitrate can be enforced in a court by, e.g., a motion to compel arbitration or to stay litigation. But what if a contracting party fails to appear to seek that enforcement?

In Crowdpay, the plaintiff brought suit for a breach of a license agreement. The defendant failed to respond to the complaint and the plaintiff sought a default judgment under N.Y. CPLR §3215 (“default judgment”).

The court noted that the contract in question “contained a provision requiring that disputes arising under the contract ‘shall’ be arbitrated,” 2019 N.Y. Misc. LEXIS 389 at *1-*2, and that plaintiff had argued that the defendant “waived” any right to arbitration due to its default, albeit without citing any supporting authority. The court, however, later found such authority in the Charming Shoppes decision. There, the court had held that “the Defendant effectively waived its right to enforce the arbitration clause when it failed to answer in response to the summons and complaint under circumstances where there was no reasonable excuse for such default.” 2000 N.Y. Misc. LEXIS 471 at *7-*8.

In Crowdpay, the court granted the plaintiff’s motion for a default judgment but deferred ruling on whether the defendant had waived its right to arbitrate “unless and until defendant makes a motion to vacate the default judgment and asserts a right to arbitrate the dispute.” 2019 N.Y. Misc. LEXIS 389 *2-*3. (The court allowed that the defendant might successfully seek vacatur of the default judgement if he could satisfy the relevant requirements of N.Y. CPLR § 5015 or some other relevant law. (Id. at *3.))

The Charming Shoppes decision presented a more complex situation and a less satisfying analysis. There, the plaintiff brought suit for breach of contract, seeking specific performance, and sought a default judgment when the defendant failed to answer the summons and complaint. Weeks after that, defendant’s counsel contacted plaintiff’s counsel, and continuances were eventually granted to allow the parties to try to negotiate a settlement. Those negotiations failed after several months, and defendant then filed a “cross-motion” seeking to compel arbitration among other things. The court granted plaintiff’s motion and denied defendant’s cross-motion, holding that the defendant had waived any right to compel arbitration by failing to answer the complaint, by delaying the progress of the suit, and by participating in settlement conferences and negotiations.

The court opined that in general “a defendant may waive any right to submit issues to arbitration by his actions.” 2000 N.Y. Misc. LEXIS 471 at *8 (“a defendant may ‘waive[] any right to stay the action [based on an arbitration clause] by its affirmative use of the judicial proceedings’”), citing DeSapio v. Kohlmeyer, 35 N.Y.2d 402, 405 (1974). It also opined that

“[t]hough arbitration clauses are generally enforceable, they cannot be used to bypass the statutory provisions requiring that pleadings be answered or to thwart a proper motion for a default judgment.” Id. at *7.

The Charming Shoppes court too allowed that such a waiver could be “set aside” if the defendant demonstrated that a default judgment was not warranted. Id. at *8. However, the court found that the defendant there had failed to demonstrate a basis for denying a default judgment.

The Charming Shoppes court also opined that the defendant’s participation in a lawsuit could manifest an “affirmative acceptance of the judicial forum,” which would be inconsistent with a later claim that only the arbitral forum is satisfactory. Id. at *9. A bit less satisfyingly, however, the court found such “participation” in defendant’s (i) failure to answer the summons and complaint, id. at *9 n.2; (ii) participation in settlement conferences and its agreement to a settlement in principle, id. at *12; (iii) requests for adjournment of the default judgment motion, id.; (iv) eliciting of relevant information concerning the issues in the case from the plaintiff during settlement discussions, id.; and (v) delay of a default judgment for approximately three months, id. at *12. This justification seems questionable.

But it illustrates the perils of failing to make a timely response to the commencement of suit by an adversary, even if that initiation of litigation was contrary to an applicable arbitration agreement.

Caveat Contractor: Arizona Court Of Appeals Interprets Prompt Pay Act As “Prompt Billing Act” To Deny Relief To Unpaid Contractor

Todd A. Baxter | Dickinson Wright | March 5, 2019

The Arizona Court of Appeals recently denied a contractor’s claim that the owner had violated Arizona’s prompt pay act (“Prompt Pay”) despite the owner’s admission that it had not paid the contractor or objected to the payment application within the statutory time.1 The court’s reason for denying the claim? The payment application included items not supplied within “the preceding thirty day billing cycle.”2 That’s it.

The contractor explained that imposing a strict thirty-day billing cycle would up-end the usual dealings between contractors and subcontractors and create problematic situations regarding materials that are often acquired, stored, and installed during different billing cycles.3 The court did not disagree, but stated that such a potential impact made no difference to its ruling. Instead, it noted that if a statute’s “plain language” “results in awkward procedures, or leads to a harsh result” (as it seemed to acknowledge happened here)4, it is up to the legislature to correct the language, not the court.

Most surprising, though, is not that the court found the owner had a right to object to being billed for labor and materials supplied more than thirty days ago (which might be justified), but that it found the owner was not obligated to object or explain its reasons for withholding payment. Despite paying lip service to Prompt Pay’s primary purpose of requiring owners to object to problems early so that those involved in the work (contractors, subcontractors, and suppliers) receive, yes, “prompt payment,”5 the court concluded that the thirty-day billing cycle referenced in the statute imposes an obligation on the contractor in order to “benefit from” Prompt Pay.6If labor or materials are supplied, but are not billed until after the next regular billing or estimate, the owner may withhold payment for those items – without objecting to them – and not violate Prompt Pay.7

A billing cycle that requires owners to either make payment or state objections within a specified time after each billing is in keeping with Prompt Pay’s purpose; depriving contractors entirely of Prompt Pay’s protections – 18% interest and attorneys’ fees – for work not billed within thirty days of performance, is not.

The court may be right that the legislature needs to revise the language of Prompt Pay to avoid the potential for awkward procedures and harsh results. Until that happens (and don’t hold your breath), contractors should be careful to include in every “billing or estimate” 8 all work performed and materials supplied during any given thirty-day billing cycle, and shift the burden to the owner to object to any items it believes should not have been included.


1. SK Builders, Inc. v. Smith, Ariz. Adv. Rep. 15 (App. 2019).

2. Id. at 16, ¶ 12-14.

3. Id. at 16-17, ¶ 15.

4. Id. at 17, ¶ 18.

5. Id. Quoting Stonecreek Bldg. Co. v. Shure, 216 Ariz. 36, ¶ 16 (App. 2007) (quotation and internal citation omitted).

6. Id. at 16-17.

7. An owner would still be required to pay for non-defective work, and potentially be exposed to contract rate interest, but the contractor’s leverage under Prompt Pay is removed.

8. Id. At 16, ¶ 12 (quoting Prompt Pay)

How to Stop Delay, Deny, Defend

Chip Merlin | Property Insurance Coverage Law Blog | March 5, 2019

Rutgers insurance law professor Jay Feinman wrote a book, Delay Deny Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It, which exposed many insurance company unfair claims practices. In the last chapter of the book, he discussed how we can stop insurance claim wrongful delays and denials.

The problem of insurance companies that delay, deny, and defend is big. No one—except the companies themselves, and they’re not telling—Knows exactly how big. But the problem is big enough that thousands of individual policyholders…are not getting the benefits their insurance companies owe them. Big enough, too, that as awareness of the problem increases it may undermine public confidence in the insurance industry.

Consumers can take some steps to protect themselves against unfair claim practices, but they cannot prevent or cure the practices themselves. Bad practices persist because government regulators have failed to do enough to prevent and punish them. Lawmakers and regulators in every state need to do three things to protect consumers (and consumers need to push them into action). First give consumers the information they need to take a company’s claim practices into account when they shop for insurance. Second, make clear in the law that the rules of the road of claim handling are binding on insurance companies, and give regulators the power to enforce those rules. Third, make sure policyholders and accident victims filing claims have the ability to hold insurance companies accountable when the companies delay, deny, or defend.

Here is a paradox: Insurance is the most highly regulated business in the United States, but the system of regulation has so far failed to implement these reforms and to protect policyholders and accident victims from unfair claim practices. Why isn’t more being done?

J. Robert Hunter, Director of Insurance, Consumer Federation of America, agreed that Feinman’s book “explains how America’s premier insurance companies systematically rip off consumers.” Hunter also had this to say following Hurricane Michael:

Americans always pull together to protect one another whenever there is a disaster like this, but when it comes to rebuilding homes long after the storm has passed, too many people find themselves in lonely battles with insurance companies. We all will have to keep a spotlight on the communities hit by Michael to make sure that survivors don’t face a second disaster in the shape of unfair practices by their insurance companies.

While I recognize that many claims get paid and resolved without problems, lawyers in my firm see the unfair claims practices and abuses. Who would call lawyers if your claim is settled quickly and to your satisfaction? But, the issue is “what to do about the abuses and wrongful actors?”

Both Hunter and Feinman agree that insurance regulators have been largely ineffective stopping unfair claims practices. Feinman noted:

A third form of unfairness is the subject of this book, opportunism through delay, deny, defend by the insurance company at the point when its promise obligates it to pay a claim. As the book demonstrates, here market conduct regulation has been notably ineffective. Claims practice regulation is typically an afterthought for regulators; a textbook coauthored by Therese Vaughan, former insurance commissioner of Iowa and now CEO of the National Association of Insurance Commissioners, perhaps inadvertently illustrates the problem when it notes, in only a single sentence between the three-page discussion of solvency regulation and a three-page discussion of rate regulation: ”States have also adopted laws governing claims settlement and prohibiting unfair claims settlement practices. ” Deborah Senn, former Washington insurance commissioner, put it more bluntly: “Regulators have been nowhere on this. Regulation has really failed this issue.

Hunter’s website says:

Consumers spend hundreds of billions of dollars a year on car, home, and life insurance products whose complexity and individual pricing permit insurer inefficiency and abuse. A large majority of the state insurance departments that regulate these insurers have neither the resources nor the will to do so adequately. . . .

So when the Insurance Journal article, Sometimes I Disagree With Blogs I Love, thought that the idea of an administrative complaint rather than a policyholder’s own right to bring a civil lawsuit would prove effective, I would suggest that those studying the situation, and with a lot more experience with unfair claims practices, strongly disagree. Me included.

Indeed, Professor Feinman’s conclusion was that we need stronger laws from our legislatures to fully allow policyholders and victims of insurance company abuse to protect themselves and seek redress:

Establishing an action for bad faith or other wrongful behavior is important; making the action effective is equally important. Making the action effective requires that the policyholder or victim be fully compensated for the harm suffered, and that the economic incentive for delay, deny, defend be taken away from the company. When a company violates fair claims practices, the harm and the incentive should be reflected in the damages. Many courts and legislatures have responded, and all should provide a comprehensive approach. When a policyholder sues for bad faith, the damages start with payment of the full amount of the loss that she was entitled to receive under the policy. If that’s all the company has to pay, the company has an incentive to delay, deny, defend. More is required.

Which begs the question I wrote in a previous blog:1 Why are some Florida politicians supporting laws that remove protections for policyholders?

It is pretty obvious that unless those representatives are working for an insurance company, nobody would think of this legislation by themselves. I suggest that the insurance lawyers and lobbyists are behind this with their massive lobbying monies. I bet those lobbyists quietly admit that they would be upset if they had their insurance claim delayed or wrongly denied only to find out that there existed no remedy to cure the extra damages caused by those actions.

This topic of insurance company lobbying was also studied by Professor Feinman. It will be ripe for discussion tomorrow.

Thought For The Day

Do I not destroy my enemies when I make them my friends?
― Abraham Lincoln
1 Delays, Denials and Underpayments Occur When Insurance Companies Are Not Held Accountable—What Are Florida Legislators Thinking? Property Insurance Coverage Law Blog, Feb. 29, 2019.

When is a “Willful” Violation Willful (or Not) Under California’s Contractor Enforcement Statutes?

Garret Murai | California Construction Law Blog | March 4, 2019

The enforcement statutes applicable to the California Contractors’ State License Board aren’t exactly models in clarity. A few examples:

  1. Business and Professions Code Section 7107:  Abandonment without legal excuse of any construction project or operation engaged in or undertaken by the license as a contractor constitutes a cause for disciplinary action.
  2. Business and Professions Code Section 7109: A willful departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, unless the departure was in accordance with plans and specifications prepared by or under the direct supervision of an architect.
  3. Business and Professions Code Section 7110: Willful or deliberate disregard and violation of the building laws of the state, or any political subdivision thereof, . . . or of the safety or labor laws or compensation insurance laws or Unemployment Insurance Code of the State, or of the Subletting and Subcontracting Fair Practice Act, or violation by any licensee of any provision of the Health and Safety Code or Water Code, relating to the digging, boring, or drilling of water wells, constitutes a cause for disciplinary action.

We’ve had lively, late-evening debates in my office over what constitutes “abandonment without legal excuse” under Business and Professions Code Section 7107, what a “willful departure” and  “in any material respect” under Business and Professions Code Section 7109 are, and what “willful or deliberate disregard” under Business and Professions Code Section 7110 really means.

The exciting lives of construction attorneys. At least, on occasion, it’s followed by a beer.

While it’s the job of a lawyer to argue over what a statute means and how it should be applied, it’s the judiciary’s job to play referee and actually make those calls. And the judiciary has made a call, at least with respect to one of these code sections.

In ACCO Engineered Systems, Inc. v. Contractors State License Board, 2nd District Court of Appeals, Case No. B282944 (Nov 15, 2018), the Court of Appeal wrestled with the meaning and intent of the term “willful” under  Business and Professions Code Section 7110 and whether a violation required “specific” or “general” intent.

ACCO Engineered Systems, Inc. v. Contractors State License Board

In 2014, ACCO Engineered Systems, Inc. received notification of a complaint filed with the California Contractors State License Board alleging that ACCO had replaced a boiler at a commercial building in Los Angeles, California without obtaining the required permits. Upon receiving notification of the complaint, ACCO conducted its own investigation and determined that permits should have been obtained for the boiler under Los Angeles’ municipal building code, belatedly obtained the necessary permits in July 2014, and informed the CSLB that the failure to obtain the necessary permits was due to the inadvertence of a lower-level employee.

The CSLB later issued a citation imposing a $500 civil penalty against ACCO for violating Business and Professions Code Section 7110, which provides, in pertinent part, that the “[w]illful or deliberate disregard and violation of the building laws . . . constitutes a cause for disciplinary action.” ACCO appealed the decision and an administrative hearing was held in September 2015.

Following the administrative hearing, the administrative law judge issued his decision finding that ACCO’s failure to obtain a permit before replacing the boiler was not “deliberate” within the meaning of Business and Professions Code Section 7110, but that ACCO’s conduct was “willful” under the statute, notwithstanding ACCO’s argument that its failure to obtain necessary permits was an inadvertent mistake. Noting that ACCO took efforts to immediately remedy the situation, however, the administrative law judge reduced the penalty from $500 to $200.

Legal fees apparently being no impediment, ACCO filed a petition for writ of administrative mandamus, appealing the decision to the Superior Court. ACCO’s petition, however, didn’t fall on kind ears. The Superior Court denied the petition finding that the term “willful” as used in Business and Professions Code Section 7110 only requires a showing of “general,” not “specific,” intent and that when ACCO’s project manager made the decision to proceed without a permit without first consulting with ACCO’s in-house permitting coordinator, as company policy required, he acted with general intent.

ACCO appealed.

The Appeal

The 2nd District Court of Appeal, while noting that the term “willful” is not defined in Business in Professions Code Section 7110, explained that it must be construed in harmony with similar statutes and the intent of those statutes, which with respect to the enforcement statutes applicable to the CSLB is to “protect the public against dishonesty and incompetency in the administration of the contracting business.”

Under a similar statute, Business and Professions Code Section 7109, which provides that a “willful” departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, earlier cases have “require[d] only a general intent to perform an act, not a specific intent to violate a law,” explained the Court of Appeal.

Further, rejecting ACCO’s argument that such an application turns the statute into a strict liability statute, the Court of Appeal stated that it does not:

We can imagine the absence of willful or deliberate disregard of building laws occurring in the following scenario: A contractor attempts to obtain a building permit but is unable to obtain one because the local permitting authority incorrectly believes no permit is required. Even if it is later established that the permit should have been issued, the contractor’s failure to obtain the required permit cannot be considered a “willful’ violation of the applicable laws, and therefore discipline under section 7110 would not be warranted. We can also imagine the absence of willful or deliberate disregard of building laws where a city’s permitting requirements are ambiguous or subject to interpretation.

Finally, the Court of Appeal rejected ACCO’s argument that by interpreting the term “willful” under Business and Professions Code Section 7110 to encompass even actions involving general intent it precludes a contractor from being able to show that it acted in good faith. The Court held that unlike under criminal statutes “moral blameworthiness is not a necessary element of willful misconduct” under Section 7110, since the purpose of the law is not to punish but rather “toprotect the public against dishonesty and incompetency in the administration of the contracting business.”


So there you have it. Except in very limited circumstances, a contractor’s actions will be considered “willful” under the enforcement statutes of the CSLB irrespective of whether the contractor intended the result or not. I think someone owes me a beer.