Building a Case: Document Management for Construction Litigation

Robert A. Gallagher, Jane Fox Lehman and Michael I. Frankel | Pepper Hamilton | October 2, 2019

Success in construction litigation often turns less on counsel’s ability to craft legal arguments and more on counsel’s ability to gather, master and present the often complex set of facts underlying the case. In construction matters, most of the key facts are found in documents: contract documents, drawings, plans and specifications, schedules, submittals, progress reports, daily logs, change orders, invoices and payment records. Nowadays, these documents will almost certainly be created, exchanged and stored electronically; many will never exist in hard copy. As such, timely collection, organization and analysis of electronically stored information (ESI) is crucially important in construction litigation.

The construction industry has always involved a large quantity of records. Today, the majority of those records exist only as ESI: Design professionals use computer-aided design (CAD) software to create construction plans. Construction managers use Primavera or similar software to create schedules and workflows. Estimators use job cost control programs. Innovative firms capture digital photos of the project, from mobilization through the punch process.

Because ESI is created and exchanged at a higher rate than hard-copy documents, ESI has facilitated a dramatic increase in the volume of records associated with construction projects. Further compounding the increase is the proliferation of mobile devices. With a smartphone in every pocket, ESI creation has moved out of the home office and the site trailer and onto the site itself. As the volume of ESI expands, so too does the time and expense associated with storing, processing, reviewing and producing these records. This article will cover strategies for balancing time and expense with the requirements of the rules and the needs of the case.

Preserving Documents

The first and most important consideration in a thorough document collection is document preservation. In general, the duty to preserve documents arises when a party knows litigation is pending or likely. Construction practitioners should carefully consider when this occurs: The duty may arise as early as the time of the first differing site condition or change order, or as late as the service of the complaint. As soon as possible after the duty arises, counsel should devise and send a “litigation hold” to project personnel, instructing them not to delete ESI or discard hard-copy documents that may be relevant to the case. In a construction case, the litigation hold may need to cover personnel who are no longer actively working on the project, as projects often span multiple phases and several years.

The hold also may need to cover mobile devices, as project personnel, particularly those on site, commonly communicate via text messaging and voicemail. Preserving mobile device data can be tricky. Personnel may use their personal device — or devices — for work; they may lose, update or upgrade those devices; and they may store their data in the cloud. Preserving mobile device data is also expensive, as imaging a single device can cost a few hundred dollars. But these devices may hold facts critical to your story, such as photos that depict progress at a critical juncture, text messages that demonstrate constructive notice, or voicemails that evidence another party’s admission. Further, the failure to properly preserve, collect and produce discoverable mobile device data can subject a party to sanctions, up to and including dismissal of the case.

Collecting Documents

Today, it is standard for parties on large construction projects to use a dedicated server or share a cloud-based electronic document management (EDM) storage system to store, review, annotate and exchange project documents, including submittals, construction drawings and correspondence. These databases, which are typically hosted by the general contractor, can be a rich source of key documents for litigation. As such, the party hosting the databases should be aware that the database contents will almost certainly be the subject of discovery requests directed to them. Nonhosting parties may not have access to certain database contents unrelated to their scopes of work, or their access may have been severed after a contentious termination. For this reason, it likely will be the hosting party’s responsibility to export the contents for production. The hosting party should take care to preserve the database contents to avoid any charges of spoliation of evidence.

In addition to shared online document repository databases, parties on construction projects typically keep individual project files, which are internal repositories of all project documents. These too will almost certainly be the subject of discovery requests. As parties often have legal counsel (both in-house counsel and outside counsel, sometimes from multiple law firms) advising them at various stages of the project and on a variety of issues (including regulatory, permitting, land use, procurement, contract and litigation issues), parties should take care to segregate attorney communications, work product and similar documents from their files during the course of the project.

Parties should also conduct thorough screens of their project files for attorney communications, work product and similar documents before producing them to any other party. As parties often use third-party, nonlegal professionals, such as engineers, to assist attorneys in drafting contracts, permit applications and other documents, thorough screens require an understanding of the relationship between the attorneys and the nonlegal professionals to determine whether the presence of a third-party, nonlegal professional on an attorney communication destroys its privileged status.

Reviewing Documents

Construction practitioners now rely on advanced discovery technologies to limit the number of documents they collect and produce and the attendant costs to process, host and review those documents. Technology-assisted review (TAR) can reduce — or at least prioritize — large document volumes through deduplication, email threading, topic analysis and predictive coding. But practitioners should keep in mind that current TAR techniques rely on the text content of documents to reduce document volumes. As such, certain records common in the construction industry are poor candidates for TAR, including records that have no text, such as photographs and diagrams; records that have minimal text, such as schedules and drawings; and records that have text not in narrative form, such as spreadsheets and charts. These documents should be identified using available metadata (e.g., file extension or document name) and sequestered for human review.

Construction practitioners also frequently negotiate ESI protocols as a way to make discovery more efficient. Such a protocol might limit document collection from a particular custodian to the tenure of his or her time on the project. Or it might limit collection to those documents that hit on specific keywords, such as the project name, contract numbers, project acronyms, project locations and the names of other parties involved on the project. Using keywords to limit document collection can cut down on costs, but it does carry the risk of excluding relevant documents, as dedicated project personnel may not identify the project by name in their communications, especially informal communications.

Using keywords carries the risk of over-inclusivity, too. Construction personnel, especially at the management level, often have responsibilities across multiple projects, and so a keyword search for a particular project name may capture a substantial number of documents that cover more projects than the one at issue. Depending on the sensitivity of this “other project” material, care may need to be taken to identify the material and either redact it or withhold it. Counsel may also consider stipulating to a procedure for designating and protecting such documents as part of an ESI protocol.

Conclusion

Even as ESI has improved the quality and availability of documents associated with a construction project, it has dramatically increased the quantity of these documents. This increase in quantity has made collection, organization and analysis of documents more challenging, more time-consuming and more expensive. Fortunately, there are strategies available to ensure a proper, thorough and efficient process that will set the construction practitioner up for successful litigation.

Insurance Companies Should Be Accountable For Not Including Legally Required Costs Of Safe Construction

Chip Merlin | Property Insurance Coverage Law Blog | October 14, 2019

Safety is first. But that is not the course of affairs when dealing with insurance company adjusters who usually say that they will not include the costs of legally required safe construction practices because their managers will not allow those costs.

Why do insurance companies not follow the law? That question is pretty easy to answer: Most insurance commissioners do not closely monitor what is going on in the field and insurance companies want to decrease costs.

A Merlin Law Group employee asked me about a recent article, Ohio Roofing Contractor Imprisoned After Employee’s Fatal Fall, and asked me how insurance companies do not get imprisoned for failing to include safety costs in their estimates. I Said that they should get imprisoned and ‘if just one company claims manager was imprisoned, you could bet that there would be a lot more compliance for including these costs.’

I will be giving a speech about these issues on Wednesday at the First Party Claims Conference. I have an OSHA expert, Kevin Dandridge, and a certified Xactimate expert, Steve Shannon, speaking with me on a panel discussing these issues. I hope you can join us and please call me with questions because all construction estimates have to follow the law.

Failure of Insured to Provide Requested Documents Triggers Appraisal Under First Party Insurance Policy

Paul Ferland | Property Insurance Law Observer | October 14, 2019

Those familiar with first party insurance policies have undoubtedly encountered a recurring issue with the interpretation of appraisal provisions – what does it mean to disagree on the amount of loss?  In Valvano Realty Co. v. American Fire and Casualty Co., the United States District Court for the Middle District of Pennsylvania recently held that a disagreement on the amount of loss encompasses situations where an insurer claims it needs additional documentation before it can determine whether a disagreement exists.  Valvano involved a December 18, 2015 fire at the Plaintiff’s property in Dickson City, Pennsylvania, which was insured by American.  American’s adjuster, working with a retained construction consultant and structural engineer, determined the replacement cost value of the loss to be $140,920.61, and the actual cash value to be $110,608.34.  Plaintiff disagreed, claiming the building was a total loss, and demanded the policy limit for property damage of $850,113.  American paid its adjuster’s determination of the actual cash value of the loss ($110,608.34) and, in response, Plaintiff indicated its intent to invoke the policy’s appraisal provision to settle the dispute.  The relevant provision states as follows:

If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss.  In this event, each party will select a competent and impartial appraiser.  The two appraisers will select an umpire.  If they cannot agree, either may request that selection be made by a judge of the court having jurisdiction.  The appraisers will state separately the value of the property and amount of loss.  If they fail to agree, they will submit their differences to the umpire.  A decision agreed to by any two will be binding.

American refused to proceed to appraisal, and Plaintiff filed suit alleging breach of contract and statutory bad faith.

During the lawsuit, Plaintiff maintained its interest to move forward with appraisal.  Accordingly, Defendant filed a motion requesting that the Court appoint an appraiser for American.  American argued that its failure to pay the amount demanded by the Plaintiff does not trigger the policy’s appraisal provision.  Further, American argued that Plaintiff had failed to provide requested documentation, the receipt of which was necessary for American to determine whether a disagreement over the amount of loss actually exists.  For its part, Plaintiff claimed it provided information to American’s counsel and, as a result, the parties should proceed with appraisal.

The Court granted Plaintiff’s motion, finding the parties essentially disagreed on the amount of the loss, thereby triggering the policy’s appraisal clause.  In arriving at its decision, the Court referenced several general points of law regarding appraisal provisions relevant to its analysis, chief among them being that in order for a case to be  appropriate for appraisal, two conditions must be met:  (1) the defendant has admitted liability for the loss; and (2) there must be a dispute only as to the dollar amount of the loss.  Here, the Court found that American never raised an issue of coverage, and indeed admitted the loss occurred and the policy applied.  Significantly, in stressing that appraisal is an inappropriate forum for coverage disputes, the Court adopted a rather narrow view of what constitutes a coverage dispute:  “[a] dispute of coverage, improper for appraisal, occurs when an insurance company claims an exclusion of a loss under the terms of the insurance policy.”  Accordingly, the Court rebuffed American’s argument related to its failure to receive relevant documents.  “American’s contention that it needs additional documentation to decide the extent of the loss is just another way of saying that there is a fundamental dispute as to the amount of loss.”  Thus, the Court held that a lack of documentation was not a coverage dispute, but rather a dispute over the extent of the fire damage, which was appropriately resolved via appraisal.

No. 5 – 10 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make in Mediations

David K. Taylor | Bradley Arant Boult Cummings | October 10, 2019

This post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.

Number 5: Not Letting the Client and Mediator Talk

Most mediators want to hear and talk directly with the client – not the attorney – since she is ultimately going to make the decision at the end of day. Counsel, you have to jettison your ego. Do not try to cut off this vital communication. Your client may need to get something off his chest, and he finally has someone other than his lawyer at whom to vent. Mediators are paid to take it, and these direct conversations with the client are is immensely helpful for the mediator to determine the key factors to getting to a deal. Remember these are settlement discussions, and “what happens in mediation…stays in mediation.” The mediator needs to know the temperatures in all caucus rooms and many times “non-legal” factors that are not available in court determine if a deal can be done.

Many years ago, I resolved an age discrimination claim by talking directly to the client. She just wanted to move to another city to be near her grandchildren but had no money to do so. The final deal included a year’s prepaid rent and a used car. The lawyers were not happy, but they are not a mediator’s client: the client is the Deal.

A mediator must establish a position of trust and confidence (and frankly likability) with the key client decision makers so that, when it is time to “fish or cut bait,” the clients will listen to what the Mediator has to say. That cannot happen when the lawyer does all of the talking, and the client just sits there mute like a house plant. Good mediators will not let that happen, even if that means hauling the lawyer out of the caucus room and having a stern discussion.

This post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.

Number 6: Failing to Be Intellectually Honest with the Mediator

Number 6: Failing to Be Intellectually Honest with the Mediator

Let’s get real. All mediators know that there is a game to be played if a settlement is to be reached.  They understand there are client representatives in the caucus rooms who are paying their lawyers by the hour (normally) and expect their lawyers to be tough, hard-nosed bulldogs fighting (especially if there is bad blood between the parties) to bat down any arguments. However, that is often incompatible with meaningful settlement discussions which require, both for lawyers and clients, a realistic assessment of the dispute. Mediators understand that there is a fine line to be balanced by the mediator and the lawyers.

Mediators expect good, tough representation, but do not insult the mediator’s intelligence and knowledge about the subject matter of the dispute and the law. Beyond the initial presentation of your client’s position (in which you can certainly be a zealous advocate), mediators want frank and candid discussion of the strengths and weaknesses of the case.  What are the best and worst case scenarios? What will be the future litigation expenses and legal fees? That can sometimes mean pulling the lawyers out of the room to have those frank discussions. Good lawyers want that from the mediator, even in front of their client. Because no matter how many times a lawyer may have told a client about the weaknesses in a case, there is something about having an experienced mediator explain to the client, face to face, the same thing and that all of the great lawyering in the world (of course) cannot change a set of facts or the law. Your job as counsel is not to show the mediator how smart you are and how you are going to kick the other side’s backside in court, but to see if there is a way to reach your client’s goal of getting the case resolved as efficiently as possible. Rare is the client who will willingly spend unlimited legal fees, allow the company’s key workers to spend hundreds of hours in discovery and depositions, and put his business into the hands of a third party, whether it’s a judge, arbitrator or jury. Sometimes it is not just about the money…but most of the time it is about the money.

Number 7: Not Doing Your Homework

You have to know your case in and out to represent a client properly in a mediation. How else can you effectively manage your client and also discuss the issues with the mediator? You are counting on the mediator to make sure the other side understands and appreciates your positions. You may not be able to look under every single rock that can derail a mediation (or even know how many rocks are out there), but you better have identified in advance the key factors that will impact settlement. This homework must include a frank evaluation of future legal fees and costs. I have on more than one occasion as a mediator angered lawyers by challenging their low ball evaluation of legal costs and expenses in front of their client.

The mediator will also expect that you have done your homework. If you have not, you (and your client) will lose credibility with the mediator if she brings up those rocks in front of you and your client for the very first time. You will also lose face with your client if he turns to you and says “what was that all about” when the mediator leaves your room. When it comes time to close the deal, it is vital that the client still has full faith and confidence in your advice.

To help you think through those rocks, use your draft mediation statement as a guide, even if you carve off some parts before you send it to the mediator. It is also very important to send any draft and final statement to your client. This also helps prepare the client. If you get something from the other side, send that to your client (you may need to send it to your client Team, even those who are not coming to the mediation). Having the client read the other side’s arguments in black and white always helps prepare the client to make the difficult business decisions about settlement. The client’s homework should include an evaluation of not just legal fees and costs, but the time and effort from key employees that will be necessary if the dispute is not settled. This is especially vital if the client has never been through a complicated commercial dispute before. Does the client really want its key employees spending hundreds of hours with the lawyers, or trying to sort through project documents (and deal with e-discovery production)?

That homework should also include calling the mediator in advance of the mediation. Recall this is not binding arbitration, but structured settlement discussions. Let the mediator know confidentially about the rocks on both sides. That can include your candid assessment of the other side’s lawyers, and even issues with your own client representative. Every mediator appreciates and covets that type of advance information which can help him hit the ground running when the mediation begins.

Number 8: Failing to Prepare the Client and Not Having a Plan

How experienced is your client representative? If she’s an in-house counsel who has attended scores of mediations, there may not be a need for much preparation, other than to make sure she has the authority to settle and understands the dispute and the issues. But if the client has limited experience, and this is a “bet the business” case, counsel MUST spend time (and that means in person, not via email or calls) to explain the process and to try to manage the client’s expectations. I have had clients think that mediation was a trial and were furious at their counsel for not “trying” the case during the mediation. The definition of “settlement”: No one is happy. The real world applies. I have yet to walk into the room of a party after a few sessions and the client say, “I now realize I was wrong; here’s a check; you are the greatest mediator in the world.”

The goal of any mediation is not to “win” but to resolve the dispute. What can your client “live with?” Talk with the client before the mediation about all possible outcomes, which can include losing at trial (even though you are, of course, the best lawyer in the world). Have a plan going into a mediation, but anticipate the need for some flexibility in case something new is revealed by the opposition or the client, such as telling the lawyer at the mediation (it’s happened more than once), “By the way, I forgot to tell you that I fired our primary fact witness last week for theft, and she hates our guts.”

Be realistic about the consequences of not getting a deal, especially future legal fees, expenses and the impact on your client’s business (including how much time the client’s key employees are going to have to spend on the case). It is amazing how many times I ask a party/counsel what their best and worse case scenarios are, including estimated legal fees/expenses. I often get a blank look. I then have to estimate legal fees and expenses through trial, and no matter what the counsel’s hourly rate is, the final number can put a client on the floor.

To be clear, great mediation advocacy is not the most important element in getting a deal done; pre-mediation planning is equally important.

No. 9: Not Having a Pre-mediation Call With the Other Lawyer and the Mediator

So, you have done your research and feel comfortable about the jointly selected mediator. You have an agreed date for mediation. Do you then just send in the confidential mediation statement and show up on the date? No.

Set up a call with the mediator (many good mediators insist) and opposing counsel and talk through the many issues that can derail a mediation. Consider the following, all of which you could address in a pre-mediation counsel conference call with the mediator.

Do you need information or documents from the other side? It can infuriate mediators when, in the middle of a mediation, they hear one side use an excuse that it does not have some information (or a document) necessary to make a decision and the other side does not have immediate access to such documents.

Do you agree to exchange all or some parts of the mediation statement? Discuss with opposing counsel what you plan to do and what you expect from the opposition.

It is also crucial to know who will attend. If the party representatives hate each other or you know that the other representative is not the decision-maker and may be covering himself because he screwed up the deal, a pre-mediation call can be essential. If insurance is involved, will the insurance adjuster (where the money will be coming from) be present? It is a bad way to start off a mediation when the lawyer shows up without the insured (who may not care because he’s not paying for the defense) or without the adjuster (who has 235 other cases) but whom the lawyer promises will be “available by phone” on the West Coast (but then disappears late in the afternoon when that side needs some additional authority to get the deal done).

The lesson is that the more you learn from a pre-mediation call with the mediator and counsel, the more time and attention you can devote to the real factual and legal issues in dispute during the actual mediation.

To be clear, great mediation advocacy is not the most important element in getting a deal done, but it can be a major factor.

No. 10: Mediating Too Early or Too Late

Every dispute is different.  There are no firm rules as to when mediation should be considered. If the parties have a history, are in an ongoing relationship, will deal with each other in the future; and the legal fees/expenses will be substantial, it may make sense to try to set up an “early” mediation, even prior to the filing of a lawsuit. Sometimes the contract’s ADR clause requires mediation prior to litigation/arbitration. While those clauses can be waived, the issue is always whether the parties/counsel have enough information about the dispute to make good business decisions about settlement. Many times I have heard counsel say “I will be able to get an expert to support our claim,” which is not very persuasive to the other side when it is an expert-driven dispute. Sometimes there is a real concern that “final” offers made in an early mediation become sticking points for future settlement discussions. Early mediations can sometimes cause more problems, and make the parties madder at each other, especially with ego-driven clients (and yes, lawyers!). I have found that an early mediation is more likely to work is if there is a good working relationship between the lawyers who, working with an experienced mediator, can help manage the entire process (and their clients) to try to get an acceptable settlement early in the dispute.

What about “late” mediations just prior to trial? Will the parties agree to postpone a trial and stop the preparation process for a late mediation (of course, the Judge has to approve as well)? There are practical issues involved, such as finding a capable mediator at the last second and setting aside a full day (or longer) for mediation with trial counsel who have been furiously prepping for trial and who probably believe that the request is a stall tactic. My general experience is that since both sides know every inch of the other side’s case immediately prior to trial, if there is to be a last minute settlement, including during a trial, that can best accomplished between the parties/counsel without a mediator’s involvement.

So, the preferred timing for mediation is most likely sometime between early and late: a time when the parties know enough about the dispute to make well reasoned settlement decisions but not so late that the entire investment necessary for trial has already been made.

Are My Children and Their Spouses Required to Submit to an Examination Under Oath for My Property Damage Claim?

Paul LaSalle | Property Insurance Coverage Law Blog | October 13, 2019

In a recent case, a federal appeals court held that named insureds’ son and daughter-in-law were required to submit to an examination under oath (“EUO”) because they resided in the insureds’ house, and that their failure to do so precluded recovery on the insurance claim.1

In that case, two fires hit the insureds’ home in just seven months. At the time of both fires, the insureds lived with their two sons, their daughter-in-in law, and their grandchild. After the first fire, which was caused by cooking efforts that went awry, the insureds filed an insurance claim. Their insurer subsequently paid them over $600,000, and also paid for the family to live in an apartment temporarily due to the damage to their home.

While the family was still living in the apartment, the insureds filed a second insurance claim seeking approximately $330,000 for additional damage to their home from the second fire. In reviewing the second claim, the insurer hired a private investigator who determined that someone intentionally started the fire. The insurer also discovered that one of the insureds’ sons had been at the house the night of the second fire.

To determine how much coverage, if any, it should provide for the second fire claim, the insurer requested the adult family members to submit to an EUO and asked the insureds to provide tax, bank, phone and Facebook records. The insureds’ son and daughter-in-law refused to make themselves available for a full EUO. Moreover, the insureds never gave the insurer the requested documents.

The insureds filed a breach of contract action when the insurer denied coverage on the second claim. In its defense, the insurer maintained it properly denied the claim because the insureds did not honor the conditions in their insurance policy.

The insureds’ insurance policy required, as a precondition of coverage, that “the insured person … submit to examinations under oath.” The policy defined “insured person” to include the person named in the insurance agreement and that person’s relatives who live in the same house.

The court found that the son and daughter-in-law qualified as insured persons under the policy’s definition. Consequently, their failure to appear for an EUO after repeated requests was a violation of a condition precedent that precluded recovery on their second fire claim. Furthermore, the court held that the named insureds’ failure to provide the requested documents, which were all relevant to whether the insureds committed fraud by starting the second fire, was a violation of the policy’s cooperation clause that also precluded recovery.

If your EUO is requested by an insurer, contact your local Merlin Law Group attorney for proper representation with regard to the EUO.
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1 Durasevic v. Grange Ins. Co. of Michigan, No. 18-2035, 2019 WL 3035750 (6th Cir. July 11, 2019).