Timely Paying Appraisal Award Exempted Insurer from Breach of Contract and Bad Faith Claim

Marle Laur | Property Insurance Coverage Law Blog | November 3, 2018

In the case Biasatti v. GuideOne National Ins. Co., No. 07-17-00044-CV (Tex. Ct.App. Aug. 16, 2018), Steven Biasatti and Paul Gross, d/b/a TopDog Properties, brought suit against its insurance company, GuideOne National Insurance Company for breach of contract.

TopDog Properties (“TopDog”) was insured through a commercial insurance policy issued by GuideOne National Insurance Company (“GuideOne”). The property suffered a loss as a result of wind and hail damage, and TopDog put GuideOne on notice of the loss. The insurer inspected the property and determined that the damage totaled $1,896.88. GuideOne did not issue payment to the insured since the damage was less than the $5,000.00 deductible. When GuideOne did not change its coverage determination after a second inspection, TopDog requested appraisal of the claim. GuideOne responded that under the policy, only the insurer could invoke appraisal, and it declined to do so. The insured filed suit.

Months after TopDog filed suit, GuideOne invoked appraisal. The insured resisted, and the trial court refused to compel the appraisal. On appeal, the trial court was directed to grant GuideOne’s motion to compel appraisal.

The appraisers and umpire set the amount of loss at $168,808.00. GuideOne sent TopDog a check for $146,927.30, which reflected the amount awarded less the deductible and depreciation.

TopDog then filed a motion for partial summary judgment against the insurer for breach of contract and failure to timely pay the insured’s claim. The insurer argued, in its own motion for summary judgment, that since it had promptly paid the appraisal award, the insured’s claims against GuideOne could no longer stand. The trial court ruled in favor of GuideOne’s motion. TopDog appealed.

The appellate court affirmed the trial court’s ruling, holding that since GuideOne invoked the appraisal clause following the benefits dispute, as permitted by the policy, then timely tendered the appraisal award, TopDog received the benefits it was entitled to under the policy and did not demonstrate that any policy benefits were withheld.

Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.

General Contractor’s Unjustified Threats to Assess Delay Damages Against Subcontractor are a Material Breach of Contract

Luke Nicholas Eaton | Pepper Hamilton LLP | October 11, 2018

Randy Kinder Excavating, Inc. v. JA Manning Constr. Co. 2018 U.S. App. LEXIS 21878 (8th Cir. Aug. 7, 2018)

This dispute arose from a contract to build a pumping station in Arkansas (the “Project”).  In June of 2010, the U.S. Army Corps of Engineers (“COE”) awarded a contract to Randy Kinder Excavating, Inc. (“Kinder”) to serve as the general contractor on the Project.  Kinder entered into a subcontract with J.A. Manning Construction Co. (“Manning”) to engineer, furnish and install a mechanically stabilized earth (“MSE”) wall at the Project.

The Project experienced significant delays which affected the Manning’s initial start date.  By the time Manning could begin constructing the MSE wall, only six days remained until the original completion date of the entire Project.  Unknown to Manning, however, Kinder was telling the COE that weather and other issues were delaying the Project and Kinder represented to the COE that its projected completion date for MSE wall was in the summer of 2012.  At the same time, Kinder was telling Manning that the MSE wall needed to be completed by November of 2011 and repeatedly threatened to assess delay damages against Manning if this did not occur.  In addition, during the construction of the MSE wall, Kinder and/or the COE demanded that Manning install the wall panels 0.75 inches apart with absolutely no variance, despite industry standard allowing a 0.25 inch variance.  On March 7, 2012, Kinder terminated Manning, at which point Manning had constructed 27.5 feet of the 40-foot MSE wall.  The MSE wall was later completed by a replacement contractor, although the wall as-accepted by the COE contained a number of defects that Kinder and the COE told Manning were unacceptable. 

In October of 2012, Kinder filed suit against Manning, alleging breach of contract and tortious interference.  Manning counterclaimed, allegedly that Kinder had wrongfully terminated the subcontract.  The district court conducted a bench trial, after which it decided the matter in favor of Manning.  Specifically, the district court concluded that: (1) Kinder committed the first material breach of contract by threatening to assess delay-related damages without any justification; (2) Kinder materially breached the contract by wrongfully terminating Manning; and (3) any of the alleged deficiencies in Manning’s work were not material breaches and Manning had substantially performed its obligations.  The district court awarded Manning $215,578.24, which represented Manning’s cost for unpaid labor and materials incurred prior to the date of termination.  Kinder appealed.

Kinder’s primary argument on appeal was that the district court erred in concluding that Kinder committed the first material breach, and instead Kinder argued that the first breach occurred when Manning failed to pay its suppliers for the MSE wall.

The subcontract between Kinder and Manning contained a choice-of-law provision requiring the application of Missouri law.  In Missouri, under the “first to breach” rule, “a party to a contract cannot claim its benefit where he is the first to violate it, [however] only a material breach may excuse the other party’s performance.”   Therefore, in order for Kinder to prevail, it needed to show that Manning committed the first material breach.

To determine whether Manning’s alleged failure in performance was material, the Court analyzed the five factors set out in the Restatement (Second) of Contracts §241.  After reviewing these factors, the Court determined that even assuming that Manning’s failure to pay its suppliers occurred prior to Kinder’s threats, the district court correctly determined that Kinder’s unjustified threats to impose delay-related damages were the first material breach.  Specifically, the Court noted that the evidence suggested that Kinder’s incessant threats were actually the driving force behind Manning’s failure to pay suppliers and that Manning would have paid its supplier’s invoices as soon as it received assurances that it would be paid by Kinder.

Kinder also argued that the district court incorrectly determined that Kinder’s threats were a breach of the contract.  Kinder maintained that such threats were justified because Manning was failing to comply with Kinder’s scheduling demands.  The Court rejected this argument, noting that Kinder’s argument “completely fails to acknowledge  that Manning, through no fault of its own, was prevented from beginning work until more than one year after it was originally supposed to.  It therefore would have been impossible for Manning to perform according to the timelines contained in the early schedules.”  The Court also found that Manning was, in fact, performing in accordance with the timeline contained in the schedule that Kinder sent to the COE, which stated that Manning should be finished with the MSE wall in the summer of 2012.

Is Recovery for Breach of an Insurance Policy Limited to Only Damages That Would Have Been Covered by the Policy?

Tamara Chen-See | Property Insurance Coverage Law Blog | September 1, 2018

In Florida, the short answer is “no.” Here, as in most states, traditional rules governing breach of contract apply to insurance policies, and in a proper case consequential damages may be awarded.1 Defense lawyers in first party insurance cases always dispute this argument.

The defense bar attempts to persuade courts that policy coverages and limits determine the amounts that can be recovered by a policyholder, even after the policy has been breached. And since judges generally rely heavily on the lawyers advocating for the parties to bring any specialized legal knowledge to the court, policyholder advocates are tasked to supply the courts with the caselaw clarifying this misconception. Certainly, there are some specialized rules of policy interpretation that apply because insurance policies are generally adhesion contracts, rather than ones negotiated at arms-length between parties with equal bargaining power.2 Yet insurance policies are still contracts and general contract interpretation principles provide additional ways to remedy the harm our policyholder clients suffer when an insured catastrophe happens.

Florida courts consistently apply the traditional standards to recover consequential damages in first party insurance cases. For example, in Travelers Insurance Company v. Wells,3 the Fifth District Court of Appeal held that the insureds could recover consequential damages against its carrier on a breach of insurance contract claim provided the insured proves the consequential damages were contemplated at the time the policy was issued. The Fifth DCA held:

Although that [the stated policy benefit] is normally the measure of damages for breach of an insurance contract, it is not exclusive. Consequential or resulting collateral damage may also be recovered if it can be sufficiently proved. It is possible to recover damages sustained by the wronged (uninsured) party, not because of the occurrence of the contingency which should have been insured against, but because of the breached contract, such as lost profits. Glades Oil Co. v. R.A.I. Management, Inc., 510 So.2d 1193 (Fla. 4th DCA 1987).4

Similarly, in Life Investors Ins. Co. of America v. Johnson,5 the Fourth District considered whether an insured could recover consequential damages from her disability carrier. The insured had purchased the disability policy in conjunction with a car purchase. Thereafter, the insured sustained a disabling injury. The carrier did not pay the claim in accordance with the policy, and the insured’s car was repossessed.

The insured filed suit for breach of contract. As damages, the insured sought to recover: (1) the loss of value to her car, (2) loss of use of her car, (3) transportation expenses related to the loss of use, and (4) long distance telephone calls, none of which were specifically covered by the policy. The carrier argued those categories of damage were improper and that the jury should only be permitted “to consider the amount due on the policy….” The trial court disagreed with the carrier and allowed the insured to seek recovery of these damages, and the jury returned a verdict in the insured’s favor for $3,500.

The carrier appealed. The Fourth District Court of Appeal started its analysis with a review of Hadley v. Baxendale,6 the common law case from England traditionally cited to express the standard for whether consequential damages are recoverable. This case held that damages for breach of contract “are those that arise naturally from the breach, or those that were in the contemplation of the parties at the time the contract was made.”7 Based on this rule, the court concluded that if the insured proved the carrier breached the policy, the insured was “entitled to recover more than the pecuniary loss involved in the balance of payments under the policy.”8The Fourth District held that the appropriate measure of damages for a breach of insurance contract claim was “the value of the auto or balance of payments under the policy, whichever is greater, together with the loss of use of the car from the date of repossession until the jury verdict is rendered, and interest thereon.”

Federal courts interpret Florida law the same way. In T.D.S. Inc. v. Shelby Mutual Insurance Company,9 the Eleventh Circuit considered a jury’s award of consequential damages because of a carrier’s breach of a multi-peril insurance policy. The trial court had instructed the jury “that an award could be returned for [consequential damages] if T.D.S. had shown that ‘special circumstances’ allowing for these damages had been in the contemplation of the parties at the time the insurance policy was entered into.”10

The Eleventh Circuit Court of Appeals approved of the instruction and stated, “[a]lthough generally an insurer’s liability under an insurance contract will not exceed the contractual limits of liability, the Florida courts have extended the Hadley special damages rule to allow recovery of these damages if they were in the contemplation of the parties at the time of the creation of the insurance contract.”11 The court then clarified that Florida did not predicate the recovery of consequential damages on an extra-contractual claim.

These cases involved first-party breach of contract claims where the insured requested consequential damages. In analyzing the insured’s consequential damages claim, each case differentiated between damages concerning policy benefits and consequential damages. None of these cases made an insured’s recovery of consequential damages dependent on the consequential damage being a covered policy benefit. Instead, the cases focus on whether the parties contemplated the damage to flow from the breach at the time the policy was created.

Consequential Damages are not “Bad Faith Damages.” As a final argument, the defense bar frequently attempts to characterize consequential damages as “bad faith damages.” Prior to enactment of Fla. Stat. § 624.155 in 1982 creating a “Civil Remedy” for bad faith claim handling, Florida did not recognize first-party bad faith claims.12 Therefore, if consequential damages were “bad faith damages” then the plaintiffs in Johnson and T.D.S. cases – decided before § 624.155 went into effect – would not have been able to recover consequential damages for their breach of contract claims. Consequential damages which are recoverable for a breach of contract claim focus on whether such damages were within the “mutual contemplation of the parties,” while statutory bad faith damages must be “foreseeable,” the traditional tort standard.13 This differentiation undermines the position that the consequential damages sought for breach of contract constitute bad faith damages.

This argument is straightforward, though it is unpopular with insurance carriers who want to contend that even when they breach their contractual obligations to their insureds, they still get the benefit of the limitation provisions of the policy that would apply if it had been honored. But Florida courts accept the basic proposition that once the policy has been breached by the carrier, those contractual limitations do not apply.
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1 Florida applies the general contract rules governing consequential damages in the context of breaches of insurance contracts, as well. Seee.g.Travelers Ins. Co. v. Wells, 633 So.2d 457 (Fla. 5th DCA 1993); Travelers Indemnity Co. v. Parkman, 300 So.2d 284 (Fla. 4th DCA 1974); St. Paul Fire & Marine Ins. Co. v. Thomas, 273 So.2d 117 (Fla. 4th DCA 1973); T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1531-32 (11th Cir. 1985) (Florida follows the general rule that to be recoverable, damages for breach of an insurance contract “must arise naturally from the breach, or have been in the contemplation of both parties at the time they made the contract, as the probable result of a breach.” Hobbley v. Sears, Roebuck and Co., 450 So.2d 332, 333 (Fla. 1st DCA 1984) (citing Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854)); Martin v. Monarch Life Ins. Co., 1995 WL 127157 (M.D. Fla. 1995).
2 Seee.g.Fayad v. Clarendon National Ins. Co., 899 So.2d 1082 (Fla. 2005).
3 Travelers Ins. Co. v. Wells, 633 So. 2d 457 (Fla. 5th DCA 1993).
4 Id. at 461.
5 Life Investors Ins. Co. of America v. Johnson, 422 So. 2d 32 (Fla. 4th DCA 1982).
6 Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854).
7 Johnson, 422 So. 2d at 33-34.
8 Id. at 34.
9 T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1531-32 (11th Cir. 1985).
10 Id. at 1531.
11 Id. at 1531 n.11.
12 Fridman v. Safeco Ins. of Illinois, 185 So. 3d 1214, 1220 (Fla. 2016); McLeod v. Continental Ins. Co., 591 So. 2d 621, 623 (Fla. 1992).
13 T.D.S., 760 F. 2d at 1531 n.11; Johnson, 422 So. 2d at 33-34; B-K Cypress Log Homes Inc. v. Auto-Owners Ins. Co., 2012 WL 13018751, *3-4 (N.D. Fla. 2012). Indeed, “the fact that the legislature has specifically authorized first parties to recover damages in bad faith actions suggests that it may have contemplated more than the recovery of the same damages already available for breach of an insurance contract claim.” Marracini v. Clarendon Nat’l Ins. Co., 2003 WL 22668842, *2 (S.D. Fla. Oct. 1, 2003) (citation omitted). Under Section 624.155, Florida Statutes, insureds can recover all “damages which are a foreseeable result of a violation of [section 624.155(8)]….” The statute does not examine the “mutual contemplation of the parties” standard for consequential damages resulting from breach of an insurance contract.

Colorado Court Holds No Coverage for Breach of Contract Claim

Insurance Law Blog | February 21, 2018

In its recent decision in Ctr. For Excellence in Higher Ed., Inc. v. Travelers Prop. Cas. Co. of Am., 2018 U.S. Dist. LEXIS 25424 (D. Col. Feb. 16, 2018), the United States District Court for the District of Colorado had occasion to consider whether a breach of contract claim could qualify for coverage under a general liability policy.

Travelers’ insured, the Center for Excellence in Higher Education, was the lessee of a commercial property.  The lease required it to maintain the property in good order and specifically required it to maintain, repair, and if necessary replace, the building’s roof and HVAC system.  During the Center’s tenancy, the roof and HVAC system were damaged in a hailstorm.  The Center, however, did not undertake any efforts to repair or replace the damaged property.

The Center later sued the landlord for breaches of the lease wholly unrelated to the damaged property.  The landlord, however, counterclaimed against the Center for breach of contract based on the Center’s failure to have repaired the damage to the roof and HVAC system.  The Center sought coverage for the counterclaim under its general liability policy with Travelers and Travelers denied coverage on the basis that the counterclaim sought breach of contract damages only, and thus did not trigger its policy’s coverage.

In the ensuing coverage litigation, the Center conceded that breach of contract claims generally are not insured under general liability policies.  It nevertheless argued that the landlord’s allegations could have supported a tort claim based on accidental conduct and that as such, Travelers at least had a defense obligation.  The court disagreed, observing that to state a claim for negligence, the landlord would have needed to allege facts demonstrating that the Center had a duty to maintain and repair the roof that existed independent of the contract.  The court could find no such common law duty that would support a negligence claim, nor was any such duty alleged in the landlord’s pleading.  As such, the court agreed that Travelers had no defense or indemnity obligations for the counterclaim.